Cut to Saudi benchmark lending rate doubtful

The Saudi central bank is unlikely to cut its repurchase rate, the benchmark lending rate, in response to further easing by the US Federal Reserve as it seeks to stem money supply growth, the vice governor said.

With its riyal pegged to the dollar, the world's largest oil exporter has been striving to track US monetary policy as the Federal Reserve slashes interest rates to help ward off recession while the Saudi economy surges.

"Our monetary policy will continue to address our own domestic circumstances without undermining the credibility of our peg," Muhammed Al Jasser, vice governor of the Saudi Arabian Monetary Agency, told newswire Reuters in an interview.

As the Fed reduced interest rates by 225 basis points to 3% since September 18, Saudi Arabia has followed by cutting only its reverse repurchase rate, which guides deposit rates, to the same level in order to deter bets on an appreciation of the riyal.

It has kept the benchmark repurchase rate, at which banks borrow from the central bank, steady at 5.5%, in order to prevent lower borrowing costs from stoking inflation, Al Jasser said.

"The repo rate, which is equivalent to the US Fed benchmark, has not gone down. The signal is that there will be no infusion of liquidity through the central bank to the economy," Al Jasser said.

Wall Street dealers unanimously expect the Fed to cut interest rates again by at least 25 basis points at its meeting in March, a Reuters poll showed this month.

Inflation in Saudi Arabia hit 7% in January, its highest in more than 25 years, pushing real interest rates - official lending rates minus inflation - into negative territory.

Negative real rates makes it cheaper for people to borrow than keep money in a bank deposit, encouraging investment in assets such as real estate and stocks.

But lower interest rates would not necessarily stoke credit growth being primarily driven by public sector spending, which is surging due to a near five-fold rise in oil prices since 2002, Al Jasser said.

"Inflationary pressures are primarily due to a very dynamic economic activity due to large government spending, which is also fuelling large private-sector spending," he said.

"Therefore, changes in interest rates don't affect that liquidity creation by the public sector."

The central bank has soaked up liquidity by raising reserve requirements twice since November to force lenders to keep more money in their vaults in a bid to slow down credit growth, another trigger of inflation.

Its reverse repurchase facility "is also mopping up some liquidity", Al Jasser said, without giving details.

Money supply growth in the kingdom fell to 19.6% in December, a month after the central bank raised the reserve requirement to 9% from 7%. It boosted the reserve ratio to 10% in January.

Economists, including Standard Chartered Bank's head of regional research Marios Maratheftis, have said tightening lending curbs would have little impact in restraining money supply growth.

Al Jasser disagreed. "Credit to the private sector has not grown by the same rate of growth in deposits, which indicates the dampening affect of our monetary policy instruments," he said.

A 1% rise in the reserve requirement would curb money supply growth by 41.95 billion riyals ($11.19 billion), just 2.9% of total potential money creation, Maratheftis said in a note this month. (Reuters)

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