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KSA interest rates may not track US fed

Saudi Arabia does not have to follow the next shift in US interest rate policy to maintain the relative yield of its dollar-pegged riyal currency, the kingdom's central bank governor said this week. And it will not decouple its currency from the dollar.

A Reuters poll on June 1 showed most Wall Street analysts expecting the US Federal Reserve to cut its benchmark rate from 5.25%, although they disagree on the timing.
A Fed cut would leave Saudi Arabia, the world's biggest oil exporter, and other Gulf Arab states with dollar pegs facing the prospect of having to reduce their own interest rates at a time of concern about rising inflation.

The Saudi Arabian Monetary Agency, or central bank, would take the needs of the domestic economy into account when deciding whether to shadow Fed policy, governor Hamad Saud Al Sayyari told reporters. "We will follow previous policies, depending on the local market needs," he said.

"There is a margin of flexibility as far as interest rates on the riyal and on the dollar are concerned and it is not necessary for us to follow the (Fed's) move." At 2.86% at the end of March, Saudi Arabia had the lowest inflation among six Gulf states preparing for monetary union. Saudi inflation was less than one per cent in 2005, the finance ministry said.

Qatar has the highest inflation, with prices rising 15% in the 12 months to March 31.

The central bank governor of United Arab Emirates, where inflation was around 10% last year, signalled the region's concern about rising prices when he said last month Gulf central bankers would meet to coordinate a response to any US rate cut.

Kuwait dropped its peg to the dollar on May 20, saying it wanted to contain inflation from rising import costs after the dollar tumbled to record low against the euro in April. Asked whether any divergence from US monetary policy would put pressure on the riyal, Sayyari said: "I don't see any pressures now. And we don't think there will be any."

The Fed has left its benchmark overnight lending rate steady since June 2006, when it took the 17th and final step in a two-year period of monetary policy tightening.

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