Conference Paper
Evaluating a US Policy Rate Threshold Effect on Economic Growth in the GCC Region: Do Oil Prices Matter?
No.
ERF32AC_186
Publisher
ERF
Date
May, 2026
Topic
E4. Money and Interest Rates
F4. Macroeconomic Aspects of International Trade and Finance
F1. Trade
This paper re-examines the influence of US interest rates on economic growth in the GCC region, aiming to deepen our understanding of the complicated dynamics at play, using a Threshold Structural Vector Autoregression (TSVAR) approach. Four main results are found in this investigation. First, GCC policy rates broadly follow the Fed funds rate. However, the pass-through of the US monetary policy to retail rates in the GCC countries follows an asymmetric relationship. This suggests that the impact of US policy on interbank interest rates, and consequently economic growth, varies depending on the direction and the magnitude of the US interest rate change. Second, the US monetary policy spillover to the GCC region is more important when the US interest rate exceeds the rate of 2.25%. A lower interest rate has a limited impact on GCC economies. This suggests that a minimum threshold of monetary tightening is required in the US before it generates meaningful destabilizing or restrictive effects on the GCC's economic activity. Third, the response of GCC interbank rates to liquidity fluctuations is quite limited during periods of lower US interest rates, while rates remain highly sensitive in the opposite context. This suggests that banks may be reluctant to pass on rate increases when they can secure funding at lower costs, particularly in environments characterized by lower policy rates or excess liquidity. Finally, the level of oil prices also matters for how changes in US interest rates affect non-oil GDP growth in the GCC. Higher US interest rates only harm GCC non-oil real GDP growth when oil prices are low, below $72.3 per barrel. These results could provide valuable insights for policymakers in the region to better handle US spillovers, by creating policy scenarios based on this analysis and using the right tools to proactively manage economic risks.
Authors
Assil El Mahmah
Economic Advisor, Ministry of Economy and Planning,...