Saudi Arabia, which pegs its currency to the dollar, reduced its reverse repurchase rate by 25 basis points yesterday after a US interest rate cut this week, but continued a policy of leaving its benchmark lending rate steady.
The Saudi Arabian Monetary Agency (Sama) cut the reverse repo rate to two per cent from 2.25 per cent and left the benchmark repurchase rate at 5.5 per cent, according to a Sama circular sent to banks.
Sama also raised banks' reserve requirement to 13 per cent from 12 per cent, the fourth such move since November when this rate stood at seven per cent, in an apparent bid to curb further inflationary pressure amid soaring prices.
It also raised for the first time in years the reserve requirements banks have to make for time and savings deposits to four per cent from two per cent, according to the memo.
"Sama is trying to take some liquidity off the market by raising reserve requirements. They are looking at banking system measures to deal with liquidity," said John Sfakianakis, chief economist at HSBC's Saudi subsidiary, SABB bank.
"They are telling the banks to keep more money in their vaults but whether this will reduce inflation remains to be seen," he added.
Inflation in the Kingdom jumped to almost 10 per cent in March, its highest in almost 30 years, raising pressure on the state to offset price pressures on the population of 25 million.
Inflation is a key challenge across the Gulf region, where governments which peg their currencies to the ailing dollar are raising wages and subsidies, bringing in price controls and tightening 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 this week and hinted it could be the last in a series aimed at shielding the economy from a credit crunch and housing downturn. 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. With the dollar tumbling this year to record lows against the euro and a basket of major currencies, some imports have become more expensive.
The Saudi central bank usually communicates interest rate decisions only to banks, sometimes confirming them in a public statement.
However, annual money supply growth in Saudi Arabia eased to 23.04 per cent in March, just off at least a 14-year high the month before, as investments in time and savings deposits grew less quickly, official data showed. M3, the broadest measure of money circulating in the largest Arab economy, grew to 834.04 billion riyals (Dh822bn) in the year to March 31 from 677.84bn riyals, data showed. Money supply advanced 26.15 percent in February, its fastest pace since 1994. (Reuters)
2% The reverse repo rate was cut by a quarter point to this level
5.5% Repo rate was kept steady at this level
13% Sama raised banks' reserve requirement to this percentage