Gulf States Mirror Federal Reserve with Strategic Rate Cuts to Support Economic Diversification Drive

Gulf Cooperation Council central banks moved swiftly to cut their key interest rates on Wednesday, following the Federal Reserve’s decision to lower U.S. interest rates by 25 basis points for the first time this year. The coordinated monetary policy response reflects the region’s currency pegging mechanisms and underscores the strategic importance of maintaining competitive borrowing costs as GCC economies pursue ambitious economic diversification agendas.

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The Fed’s quarter-point reduction, which brought the federal funds rate to a range of 4.00%-4.25%, won support from most of President Donald Trump’s central bank appointees despite ongoing political pressure for more aggressive cuts. The move marked a significant shift in U.S. monetary policy after a nine-month pause prompted by uncertainty surrounding the Trump administration’s trade and fiscal policies.

Regional Response: Synchronized Rate Cuts Across the Gulf

The Gulf’s oil and gas exporters generally follow the Federal Reserve’s lead on rate moves due to most regional currencies being pegged to the U.S. dollar, with only Kuwait’s dinar pegged to a basket of currencies that includes the dollar. This monetary framework ensures exchange rate stability but requires GCC central banks to align their policies with U.S. monetary decisions.

Saudi Arabia, the region’s largest economy, led the regional response by cutting its repurchase agreement (repo) rate by 25 basis points to 4.75% and its reverse repo rate by an equivalent amount to 4.25%. The Kingdom’s quick response reflects both its adherence to the dollar peg and the strategic importance of maintaining accommodative monetary conditions to support its Vision 2030 diversification program.

The United Arab Emirates’ central bank reduced the base rate applied to its overnight deposit facility by 25 basis points to 4.15% from 4.40%, effective Thursday. This reduction supports the UAE’s ambitious economic expansion plans, with the country’s economy projected to grow 5.6% in 2025, making it potentially the fastest-growing economy in the region.

Qatar’s central bank implemented a comprehensive rate reduction, lowering its deposit rate by 25 basis points to 4.35%, its lending rate by 25 basis points to 4.85%, and its repo rate by 25 basis points to 4.60%. These cuts support Qatar’s economic growth strategy, with the economy expected to reach 4.1% growth in 2025-2026, driven primarily by increased gas production capacity.

Bahrain’s central bank also participated in the synchronized easing, cutting its overnight deposit rate by 25 basis points to 4.75% from 5%, effective Thursday. Kuwait reduced its discount rate by 25 basis points to 3.75% from 4%, while the Central Bank of Oman cut its repo rate by 25 basis points to 4.75%.

Economic Context: Diversification Amid Global Uncertainty

The rate cuts come at a crucial time for GCC economies, which are pursuing unprecedented economic diversification efforts while navigating complex global economic conditions. World Bank analysis shows that the non-oil sector across the region grew by a robust 3.7% in 2024 and is expected to remain a key driver of economic growth, with projected growth rates of 3.4% and 3.5% for 2025 and 2026, respectively.

“The immediate impact (of a Fed cut) would be lower borrowing costs across public and private sectors, easing pressure on governments, firms, and households and supporting broader fiscal stimulus and investment,” explained Hamza Dweik, Saxo Bank’s head of trading for Middle East and North Africa. This reduced cost of capital is particularly crucial for GCC economies as they invest billions in developing sectors such as real estate, tourism, manufacturing, and technology.

The timing is strategic, as GCC economic growth is forecast to accelerate to 4.4% in 2025, up from earlier projections of 4.0%, driven by rising oil output and resilient non-oil sector activity. This revised outlook reflects stronger-than-expected performance in key diversification sectors and increased OPEC+ production quotas.

The Political Dimension: Fed Under Pressure

The Federal Reserve’s decision came amid intense political pressure from President Trump, who has conducted an unprecedented campaign to influence central bank policy. Trump’s pressure included criticism of Fed Chair Jerome Powell, the installation of economic adviser Stephen Miran on the Fed Board, and attempts to remove Governor Lisa Cook from her position.

Notably, Miran voted against the consensus on Wednesday, favoring a larger half-point cut rather than the quarter-point reduction ultimately approved. This dissent highlighted the growing politicization of Fed policy and the tension between the central bank’s traditional independence and political pressure for more aggressive easing.

Despite Trump’s preference for deeper cuts, the Fed emphasized a measured approach to monetary policy. Powell indicated that while further cuts are anticipated, they will be data-dependent and gradual. This cautious stance reflects concerns about persistent inflation pressures, which remain above the Fed’s 2% target despite recent moderation.

Market Implications: Dollar Weakness and Oil Price Support

The coordinated rate cuts across the Gulf region have significant implications for both regional and global markets. Gulf equity markets responded positively to the monetary easing, with most indices posting gains as investors welcomed the prospect of lower borrowing costs and continued economic stimulus.

“A softer dollar, often associated with Fed easing, could support oil prices, benefiting GCC exporters. Nevertheless, energy-market volatility remains a key risk, given evolving global demand dynamics,” Dweik noted. This dynamic is particularly important for Gulf economies, where oil revenues still play a crucial role in government finances despite diversification efforts.

The rate cuts are expected to have immediate benefits for various sectors. Lower borrowing costs should stimulate investment in infrastructure projects, real estate development, and manufacturing initiatives that are central to regional diversification strategies. For consumers, the reductions should translate to lower costs for mortgages, business loans, and other forms of credit.

Sectoral Growth Momentum: Non-Oil Economy Expansion

The monetary easing comes as Gulf economies demonstrate strong momentum in their non-oil sectors. Purchasing Managers’ Index readings suggest robust expansion, with the UAE’s PMI rising to 55.4 in recent months while Saudi Arabia’s stood at 58.4—both well above the 50-point threshold indicating economic expansion.

Saudi Arabia’s non-oil economy is projected to grow by 4.4% in 2025, up from 3.5% in the previous year, driven by continued investment in mega-projects, tourism infrastructure, and technology sectors. The Kingdom’s Vision 2030 program has made significant progress in areas such as entertainment, sports, and renewable energy, creating new economic pillars beyond oil.

The UAE has emerged as a leader in economic diversification, with Dubai’s tourism sector welcoming 5.3 million international visitors in the first quarter of 2025, representing a 3% year-on-year increase. The Emirates’ strategic investments, including a $1.4 trillion investment pipeline and new AI-focused collaborations, are fueling continued momentum in the non-oil economy.

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Fiscal Challenges and Investment Financing

Despite strong non-oil growth, GCC countries face fiscal pressures that make lower interest rates particularly valuable. Oil price projections for 2025 suggest Brent crude averaging $67.3 per barrel, creating fiscal headwinds for governments accustomed to higher oil revenues.

To maintain investments in economic diversification while managing budget constraints, GCC countries are increasingly turning to international debt markets. In 2024, regional debt issuance reached $120 billion, and by 2025, the region’s outstanding debt is expected to approach $1 trillion. Lower interest rates will help reduce the cost of this borrowing, making debt financing more attractive for both governments and corporations.

The improved credit environment is supported by the region’s strong sovereign ratings. The GCC heads into 2025 with its highest average sovereign credit rating since 2017, with Saudi Arabia upgraded by Moody’s to “A1” and Oman upgraded to “BBB-” by S&P. These enhanced ratings, coupled with lower borrowing costs, create favorable conditions for continued investment in diversification initiatives.

Geopolitical Positioning and Trade Dynamics

The monetary policy coordination also reflects the GCC’s evolving geopolitical strategy. The region is adopting a more multipolar approach to international relations, with Saudi Arabia and the UAE joining BRICS as observer and member respectively. This diversification of alliances provides more policy flexibility while maintaining strong economic ties with traditional partners.

The rate cuts come amid growing global trade tensions, with the Trump administration implementing tariffs on various trading partners. However, the direct impact on GCC economies is expected to be limited due to low U.S. export exposure and the exemption of energy products from most tariff measures.

Over 70% of the GCC’s oil and gas exports now flow to Asia, with China accounting for 20% of the total. This geographic diversification of trade relationships provides some insulation from U.S.-specific economic policies while creating new opportunities for economic cooperation and investment.

Technology and Innovation Investment

Lower interest rates are particularly beneficial for the GCC’s ambitious technology and innovation initiatives. Saudi Arabia’s NEOM project, a $500 billion futuristic city powered by renewable energy, requires massive capital investment that benefits from reduced financing costs. Similarly, the UAE’s focus on artificial intelligence, blockchain technology, and renewable energy projects will benefit from more accessible credit markets.

The region’s “golden visa” schemes, designed to attract global talent and investment, are also supported by improved economic conditions. These programs, including Bahrain’s Golden Residency, the UAE’s Golden Visa, and Saudi Arabia’s Premium Residency visa, help build the human capital necessary for successful economic diversification.

Regional Variation and Specific Country Outlooks

While all GCC countries implemented rate cuts, their economic trajectories show important variations. Qatar’s economy is expected to benefit significantly from its North Field gas expansion project, which will boost hydrocarbon production capacity starting in Q4 2025. The country’s non-oil sector growth of 2.3% in 2024 is projected to accelerate to 3.4% in 2025-2026, supported by infrastructure investments and tourism development.

Kuwait faces unique challenges due to repeated OPEC+ production cuts, with economic growth contracting by 1% in 2024. However, the outlook improves for 2025-2026, with projected growth of 2.6% underpinned by rising oil output and acceleration of infrastructure projects.

Bahrain’s economy is estimated to grow by 3.5% in 2024, supported by higher oil production from the Abu Safah oilfield and continued diversification efforts in financial services and manufacturing. The kingdom’s early start on economic diversification in the late 1960s provides a strong foundation for continued non-oil sector development.

Looking Forward: Monetary Policy Trajectory

The Federal Reserve has signaled expectations for additional rate cuts in 2025, with policymakers projecting two more reductions at the remaining meetings in October and December. This dovish outlook suggests that Gulf central banks may implement further synchronized cuts, providing additional support for regional economic growth and diversification efforts.

However, central banks remain vigilant about inflation risks, particularly those stemming from potential tariff increases and supply chain disruptions. The Fed’s emphasis on data-dependent policy making means that future cuts will depend on labor market conditions, inflation trends, and overall economic performance.

For Gulf economies, the monetary easing creates favorable conditions for continued progress on diversification goals while managing the transition away from oil dependency. The coordination of rate cuts demonstrates the effectiveness of currency pegging arrangements in maintaining monetary stability while supporting economic transformation.

Conclusion: Strategic Positioning for Economic Transformation

The synchronized rate cuts across Gulf central banks reflect more than just technical monetary policy coordination—they represent a strategic positioning for the next phase of economic transformation in the region. As GCC economies pursue ambitious diversification agendas worth trillions of dollars in investment, access to low-cost capital becomes crucial for success.

The timing of these cuts, coinciding with strong non-oil sector momentum and improving global sentiment toward the region, creates optimal conditions for accelerated economic development. With GCC growth forecasts revised upward and non-oil sectors showing robust expansion, the monetary easing provides additional impetus for continued transformation.

As global economic conditions remain uncertain and trade dynamics continue evolving, the GCC’s coordinated monetary response demonstrates both the benefits of currency pegging arrangements and the region’s commitment to maintaining competitive economic conditions. The success of these policies in supporting diversification efforts will be closely watched as a model for resource-rich economies seeking to reduce commodity dependence while maintaining macroeconomic stability.

The rate cuts mark not just a response to U.S. monetary policy but a proactive step toward creating the financial conditions necessary for the GCC’s economic vision to flourish in an increasingly complex global environment.

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By: Montel Kamau

Serrari Financial Analyst

19th September, 2025