CAIRO, Reuters -Gulf Central Banks raised their main interest rates by a quarter point on Wednesday in accordance with the U.S. Federal Reserve. The Fed began a monetary tightening process in a new aggressive stance against rising inflation.

The Fed is the most popular authority for interest rates in the Gulf Cooperation Council. All six Arab countries are tied to the U.S. Dollar, with the exception of Kuwait, whose currencies are linked to a basket comprising the dollar.

In a research note, James Swanston (Capital Economics Middle East and North Africa economist) wrote that if the Gulf policymakers did not permit interest rates to be set according to the U.S. standards, capital would leave their countries and put downwards pressure upon their currencies.

Saudi Central Bank (SAMA), increased its reverse and repo rates by 25 basis point (bps each) to 1.25% & 0.75% respectively.

SAMA stated in a statement that policy rate adjustments were consistent with SAMA’s goals of maintaining monetary stabilization and supporting stability in the financial sector in evolving domestic and global monetary conditions.

The base rate at the Central Bank of the UAE, which applies to its overnight deposit facility was raised by 25 bps, or 0.4%. CBUAE kept the interest rate for borrowing short-term liquidity through its overnight deposit facility at 50 bps higher than the base rate.

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Kuwait’s and Bahrain’s central banks also increased their key interest rates 25 basis points. Oman and Qatar are expected to follow.

Historical precedent shows that oil prices can be a greater harbinger than interest rate for the future fortunes of Gulf countries’ economies. But, Swanston noted, while these hikes may impact individuals and companies’ willingness to borrow to invest and increase savings by households.

He said that rate hikes will cause banks to consider some lending options no longer feasible due to the increased supply. This could also lead to greater debt servicing costs for individuals and businesses.

Swanston stated that “all of this acts like a headwind for domestic demand,” although it may be welcome in so far to help dampen inflationary pressures throughout the Gulf. This is despite inflation reaching multi-year highs in the region except Saudi Arabia.

He said that companies in Qatar and the UAE, especially in areas hard hit by pandemics like real estate and tourism, could see an increase in nonperforming loans, as central banks close down payment holidays linked to the pandemic.

While government debt servicing costs are likely to rise, at more than $97 per barrel all Gulf governments will be able to report a fiscal surplus in the coming year. This should reduce the need for borrowing to pay deficits.

Oman and Bahrain, however, are the only GCC nations with sub-investment grade credit ratings. They have high fiscal breakeven oil price levels, which could lead to them running into deficits.

Swanston explained that Oman and Bahrain will ultimately need financial support from the Gulf.