United Arab Emirates interbank offered rates edged down on Monday to their lowest level in nearly 17 months as regional unrest helped increase liquidity in the country's banking system.

The benchmark UAE three-month interbank offered rate was set at 1.884 percent at Monday's fixing, below 1.889 percent on Sunday and 1.915 percent seen before Dubai's debt crisis hit in November 2009.

"There has been a notable rise in deposit rates in the first quarter of 2011, most likely supported by the regional political developments," said Monica Malik, chief economist at EFG-Hermes.

"This increase in deposits has improved liquidity in the banking sector," she said.

The three-month rate, calculated from quotes provided by a dozen banks, rose as far as 2.363 percent in July 2010 as Dubai debt troubles rocked the UAE banking sector. It remains well above the Saudi benchmark of 0.731 percent.

Bank deposits in the Opec member stood at 1,105 billion dirhams ($301 billion) in March, the highest level since at least end-2008 and up 5.3 percent since the turmoil in the Arab world started in December, central bank data showed.

The world's No 3 oil exporter has escaped public protests that challenged autocratic regimes in nearby Bahrain and Oman. It has announced several measures to prevent social tensions.

"The expectation from the interbank market is that the 3-month EIBOR will continue to slide lower over the course of the year," said Ehsan Ahmed, head of rates trading for Middle East and Pakistan at Standard Chartered.

The UAE central bank had been urging banks to bring rates down and increase lending after September's $25 billion debt restructuring deal with Dubai World.

A central bank official said earlier in May he expected EIBOR rates to decline further.

However, despite banks being flush with deposits, credit in the second largest Arab economy is not seen picking up strongly as lenders stay cautious and the property sector remains weak.

"We continue to see relatively weak private sector credit growth this year," Malik said.   

UAE private sector credit was up 2.0 percent year-on-year in February, a second monthly rise in a row following at least 13 consecutive months of declines. It showed annual growth rates of above 50 percent at the height of the oil and property boom in 2008. - Reuters