UPDATE 2-UAE cbank finalising rate cut plan -paper

* UAE finalising plan to cut interest rates

* Plan does not include pushing rates to zero (Adds economist comment, background)

DUBAI, March 18 - The United Arab Emirates is finalising a plan to lower interest rates to stimulate lending but will not bring the price of money to zero, its central bank governor said in remarks published on Wednesday.

"We aim to introduce a low interest rate and maintain it," Sultan Nasser al-Suweidi was quoted as saying in newspaper Emirates Business (www.business24-7.ae). "The rate will not be zero, as is the case in the U.S."

"We have almost finished the plan and will announce the details soon," he added. "It will help to stimulate the UAE's economy."

Suweidi has said in recent months that the UAE was working on a plan with the finance ministry to reduce interest rates charged by banks on corporate deposits.

In February, Suweidi reiterated that monetary policy would continue to be geared to maintain low official interest rates and achieving low single-digit economic growth.

"We knew there was something that was brewing," said economist Philippe Dauba-Pantanacce at Standard Chartered Bank.

The UAE lowered overnight repurchase rate by 50 basis points to 1 percent in January following a series of policy moves designed to protect the banking system and the economy from the global financial crisis.

But in a sign that the economy in the UAE, the second- largest in the Arab world, still suffers strains, Standard & Poor's on Tuesday downgraded the credit ratings of seven Dubai companies and said it was worried about the health of its banks.

Banks have been hit hard by the liquidity crisis and a real estate downturn in Dubai, where residential property prices have fallen dramatically.

A cut of benchmark rates might complement the central bank's plan, Dauba-Pantanacce said. "It might go to half a point (but) in terms of economic policy, it is more symbolic than anything else," he said.

Banks have scrambled for enough liquidity to extend lending and have turned cautious toward borrowers, meaning they have not passed on lower rates into the real economy.

"The transmission mechanism doesn't work properly," Dauba-Pantanacce said.

GLOBAL STRESSES

Suweidi said the plan included measures to protect the UAE's banking sector from global stresses, including isolating it from certain financial instruments. This did not, however, mean that the UAE would consider dropping its peg to the dollar, he said.

"When I said I wished to isolate our economic system from the global financial system I meant we should be isolated from dangerous tools on which our banks depended to finance the recent boom," he was quoted as saying.

"I think we need to minimise our exposure to these dangerous tools. But lifting the peg is currently ruled out because the dollar is still the biggest currency for trade and investment in the world and there is no alternative," Suweidi said.

The paper reported that Suweidi said policy would concentrate on guaranteeing a reasonable expansion of credit with low interest rates and restricted expansion of the banking sector.

The one-month Emirates Interbank Offered Rate was quoted at 2.7750 percent on Wednesday, having fallen from levels above 4.4 percent in December, as the central bank slashed interest rates and introduced a dirham-dollar swap facility.

The central bank and finance ministry have launched 120 billion dirhams ($32.67 billion) of funding facilities for banks since September to unlock credit markets.