Gulf Arab oil producers, barring Oman, dropped interest rates on Thursday, mirroring a US cut, in a move likely to fuel near record inflation and add pressure on them to revalue their currencies or even drop their dollar pegs.

Saudi Arabia, the world's largest oil exporter, lowered its reverse repurchase rate by 50 basis points to 3 percent, matching Wednesday's cut in the United States.

The US Federal Reserve has cut its benchmark five times since September 18 by a total 2.25 percentage points. The total to date for Saudi Arabia, which pegs its currency to the dollar, is 2 percentage points.

"These countries are doing the bare minimum to try to sanitise money supply and signal to the market that they want no speculation on the currencies," said John Sfakianakis, chief economist at Saudi Arabia's SABB bank, an affiliate of HSBC Holdings.

Saudi Arabia, like most of its neighbours, continued with a policy of leaving its benchmark repo rate, which guides bank lending rates, steady at 5.5 percent, to prevent lower borrowing costs from fuelling inflation.

After an emergency Fed cut of 75 basis points last week, the kingdom and neighbouring Bahrain raised bank reserve requirements to force lenders to keep more money in their vaults.

"The central bank will have to rein in on banks eventually," Sfakianakis said.

Kuwait -- the only Gulf oil producer not pegged to the dollar -- and the United Arab Emirates each lowered their repurchase rates by 50 basis points to 3.5 percent on Thursday.

Kuwait left its benchmark discount rate unchanged at 5.75 percent, having cut it for the first time in 18 months last week following the Fed move.

The repo is the rate at which the central bank lends to commercial banks, thus guiding the rate at which the banks lend on.

Gulf states are reaping a windfall from oil prices that rose to a record above $100 per barrel this month, and that have more than quadrupled during the last six years, fuelling economic growth and inflation.

In contrast, the United States is cutting interest rates in a bid to stimulate its economy following the subprime crisis and bank losses.

"These rate cuts are just adding to the stimulus," said Monica Malik, Middle East economist at Egyptian investment bank EFG-Hermes. "It will get to a point that interest rates get so low they could push the Gulf to currency reform."    

Qatar, the world's largest exporter of liquefied natural gas, has the highest inflation in the region of 13.7 percent in September. Average inflation in Qatar may rise again this year to 14.5 percent, spurred by rents and food prices, according to economists polled by Reuters.

Qatar dropped its deposit-facility rate by 50 basis points to 3 percent but left its benchmark lending rate unchanged at 5.5 percent.

The Central Bank of Bahrain (CBB) cut its key policy interest rate by 50 basis points. Effective immediately, the CBB’s rate on the one-week deposit facility is 3.00 per cent, down from 3.50 per cent previously.  The CBB has also cut the rate on the overnight deposit facility to 2.50 per cent, from 3.00 per cent previously. The repo and lending rates remain unchanged.

"Most Gulf states have negative (real) interest rates, making it cheaper for people to borrow than to keep money in a bank," Malik said.

The UAE, which has not changed the value of its dirham against the dollar since 1997, introduced the repo rate as a benchmark in November. Inflation in the second-largest Arab economy hit a 19-year high of 9.3 percent in 2006.

Oman sets its interest rates at a weekly auction of certificates of deposit every Monday. It cut its repo rate by 61 point effective Wednesday, following last week's 75 basis-point emergency cut in the United States. - Reuters