Inflation fears force Saudi to hold back on Fed cuts

 

Saudi Arabia, which pegs its currency to the dollar, left its lending rate unchanged on Wednesday out of concern that matching a US rate cut would only stoke inflation, which already runs at a 16-year high.


The world's largest oil exporter, which has held its riyal at the same rate against the dollar for 22 years, kept its benchmark repurchase rate unchanged at 5.5 per cent, two bankers told Reuters, reading from a central bank notice.

The US Federal Reserve on Tuesday cut its key rate by 75 basis points to 2.25 per cent.

"This is in line with Saudi Arabia's policy of the last year, which is that the lending rate will not be cut when the economy is in a high growth cycle," said John Sfakianakis, economist at HSBC Holdings Plc's Saudi affiliate, SABB. "Lowering the lending rate clearly would help boost inflation."

Still, Saudi Arabia lowered its reverse repurchase rate -- which guides deposit rates -- by 75 basis points, widening the gap between what banks pay depositors and what they receive in interest from borrowers.

The United Arab Emirates, the second-largest Arab economy, cut its overnight repurchase rate by 75 basis points to 2.25 per cent, the central bank said, though the measure is not used widely by banks to set their own lending and deposit rates.

The Saudi Arabian Monetary Agency, the kingdom's central bank, usually only communicates interest rate decisions to lenders, sometimes confirming in a public statement at the end of the month.

The Fed lowered its benchmark for the sixth time since September to try to revive an economy hit by a housing slump and credit crunch.  (Reuters)

 

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