Saudi slashes lending rate

RATE CUT: Saudi has slashed its benchmark rate by 100 basis points. (Getty Images)

Saudi Arabia's central bank slashed its benchmark lending rate by 100 basis points on Sunday, the second reduction in a month to keep credit markets moving and boost domestic liquidity after inflation receded.

The Saudi Arabian Monetary Agency (SAMA) reduced the repo rate to three percent from four percent and cut the cash reserve requirement local banks have to make on demand deposits to seven percent from 10 percent, a SAMA spokesperson said citing a circular from the central bank.

The unprecedented rate move marks the third cut in less than two months by the central bank.

"These measures are taken against the backdrop of receding inflationary pressures and ensuring that adequate system liquidity is available to meet steady domestic demand," the circular said.

Two bankers estimated the reserve change will release about $2.4 billion to commercial banks - funds held in the central bank as cash reserves.

SAMA's action on two fronts could signal that it has detected "serious slowdown signs especially in the private sector", said Muhammed Younas Malick, senior economist at the state-controlled National Commercial Bank.

"SAMA is trying to stimulate the economy. There could be a slowdown coming from the credit area," he said.

The fortunes of the private sector in the world's largest oil exporter depend heavily on government spending, which in turn is subject to the price of crude oil.

A vertical fall in oil prices over the last four months coupled with production cuts by oil exporters have raised concern over growth prospects of the Saudi economy.

Despite being flush with oil revenues, economies in the Middle East are starting to feel the impact of the global financial crisis, which is freezing up credit markets, roiling stock markets and undermining economic growth.

"SAMA needed to do this to add liquidity so that there is additional credit that flows to the private sector," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi subsidiary.

"The availability of credit has reached limitations in terms of asset to deposit ratios of local banks while demand is growing."

The moves can also enable banks to lend more money to investors in the ailing stock market which closed on Saturday at a near-five-year low on concerns over the economy.

The three-month Saudi Interbank Offered Rate fell to 3.495 percent after the SAMA announcement from 3.51143 percent on Saturday.

Prior to Sunday's cuts, SAMA reduced on Oct. 12 the repo rate to five percent from 5.5 percent and the reserve requirement to 10 percent from 13 percent.

About a week later, it directly poured $3 billion in deposits into the banking system to ease liquidity pressures, its first direct injection of US dollars in a decade.

Some ten days later, it cut the repo rate by 100 basis points to four percent.

Inflation eased to 10.35 percent in September from 10.9 percent in August. (Reuters)

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