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SAMA interest rates step into line with US

Saudi Arabia's central bank unexpectedly tightened monetary policy, narrowing the gap with U.S. interest rates for the first time since a stock market crash began last year, currency traders said on Thursday.
The Saudi Arabian Monetary Agency (SAMA) raised the benchmark repo rate and the reverse repo rate by 30 basis points to 5.50 percent and 5 percent respectively, four traders in Riyadh and Dubai said, citing a memo sent to Saudi banks.
The memo gave no reasons for the first change in Saudi borrowing costs since June, they said. SAMA officials could not be reached on Thursday, which is not a working day in Saudi Arabia.
SAMA, which keeps the riyal pegged to the dollar, was making up ground lost in 2006 when it declined to match the U.S. Federal Reserve's interest rate increases during a Saudi stock market crash that began in February, traders and analysts said.
Saudi Arabia, the world's top oil exporter, and five other Gulf Arab states have pegged exchange rates to the dollar in the run-up to monetary union.

Most Gulf central banks move in tandem with the Fed to maintain their currency's yield appeal."The move is pretty much one of catch-up with U.S rates," said Shahin Wallee, currency strategist at BNP Paribas in London.
U.S. interest rates stand at 5.25 percent after 17 consecutive quarter point increases that ended in June.

The Saudi central bank moved out of step with the Fed early in 2006 as the stock market crashed.

While SAMA has never linked monetary policy to share prices, a spell of relative calm on the bourse in June allowed the central bank to match the last Fed hike, analysts said at the time.

The market, the Arab world's largest, then tumbled again, losing more than half its value and ending 2006 as the worst performer among 81 bourses tracked by Birinyi Associates Inc. a U.S. research firm.

SAMA would have been waiting for the Fed to restore the balance by cutting interest rates, something markets had initially been expecting in March, Wallee said.

"But now those expectations are disappearing and that is pressuring SAMA to raise rates."

One-year riyal forwards were trading at -50 last on Thursday compared with -130 at the start of the day, although traders said the move was exaggerated by poor liquidity.

Hedge funds piled into riyal forwards last year as the gap between U.S. and Saudi interest rates widened, helping fuel speculation about a currency revaluation. SAMA has repeatedly ruled out any changes to the exchange rate.

The interest rate differential has also led investors to move out of riyal assets into dollars. "They are making it more attractive for investors to switch back to the riyal," said John Sfakianakis, chief economist at Riyadh-based bank SABB.

Another factor could be the monetary union project, thrown into disarray last year when Oman said it would not join by a planned 2010 deadline, said Rohit Kedia, a trader at Emirates Bank in Dubai.

Other Gulf states such as the United Arab Emirates tracked Fed policy moves throughout the tightening cycle.

"If they are going to move toward a currency union, the (Gulf states) must be in line on interest rates," he said.

Although Saudi Arabia's inflation rate is the lowest in the Gulf, price pressures are building. Annual inflation as measured by the cost of living index rose to 2.8 percent in November.

"The concern that all the Gulf Arab states have got is that because of their link to a weak dollar, they are importing inflation," Richard Fox, head of Middle East and Africa sovereign ratings at Fitch Ratings, said in London.

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