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Saudi follows US lead and cuts rates

by Souhail Karam on Saturday, 03 May 2008
FOLLOWING SUIT: Sama has cut its Reverse repurchase rate but kept its lending rate steady. (Getty Images)

Saudi Arabia, which pegs its riyal currency to the dollar, cut its reverse repurchase rate by 25 basis points on Saturday following a US rate cut, but continued a policy of keeping its benchmark lending rate steady.

The Saudi Arabian Monetary Agency (Sama) cut the reverse repo rate to 2% and left the benchmark repurchase rate at 5.5%, bankers in Riyadh said, reading from a central bank circular.

Sama also raised banks' reserve requirement to 13% from 12%, the fourth such move since November when this rate stood at 7%, in an apparent bid to curb further inflationary pressure amid soaring prices.

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Sama also raised for the first time in years the reserve requirements banks have to make for time and savings deposits to 4% from 2%, the bankers added.

Inflation in the kingdom jumped to almost 10% in March, its highest in almost 30 years.

RELATED: Saudi inflation hurtles toward 10%

Rising prices are a key challenge across the Gulf Arab region, where several governments peg their currencies to the weakening dollar which makes it difficult to counter price pressures with tighter monetary policy.

As governments raise wages and subsidies, they also bring in price controls and tighten lending curbs to dampen the impact of price rises on ordinary consumers.

Flush with liquidity from record oil receipts, Saudi Arabia has recently been cutting the reverse repurchase rate instead of the repurchase rate to avoid fuelling further inflation as it tracks the Federal Reserve moves.

The Federal Reserve lowered US interest rates by a quarter percentage point, as expected, and hinted the move could be the last in a series meant to buffer the economy from a credit crunch and housing downturn.

The UAE, the second-largest Arab economy, on Thursday reduced its overnight repurchase rate by 25 basis points to 2%, keeping the rate the same as the Federal Reserve's Fed Funds rate.

Qatar continued with a trend of only cutting its deposit rate, also to 2%, while leaving its benchmark lending rate unchanged at 5.5% to prevent lower borrowing costs from stoking inflation.

Bahrain acted similarly, lowering its one-week deposit rate by 25 basis points and leaving its lending rates on hold. The one-week deposit rate was lowered to 2% from 2.25% and its overnight deposit rate to 1.5% from 1.75%.

RELATED: Gulf states toe Fed's line, cut rates

The Federal Reserve has slashed rates seven times by a total of 3.25% since September. Dollar pegs compel Gulf states to track US moves to maintain the relative value of their currencies against the greenback.

Saudi inflation almost doubled in the six months to March, driven mainly by surging rents and food prices.

Subsidies aimed at helping lower-income Saudis, state employee cost-of-living allowances and lower import levies on various food items are among measures Saudi Arabia has introduced to help consumers cope with rising inflation.

The central bank of the world's largest oil exporter usually communicates interest rate decisions only to banks, sometimes confirming them in a public statement. (Reuters)

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