Sama slashes repo rate by 100bps to three per cent

The Saudi Arabian Monetary Agency (Sama), the Kingdom's central bank, yesterday cut the repurchase, or lending, rate by 100 basis points and slashed banks' reserve requirements to seven per cent, a senior banker said.

"They sent out a statement saying the repo rate has been cut 100 basis points to three per cent and reserve requirement is cut from 10 to seven per cent," the Riyadh-based banker said.

According to the Sama statement, "these measures are taken against a backdrop of receding inflationary pressures and ensuring that adequate system liquidity is available to meet steady domestic demand," another banker said.

The central bank's surprise move will ease liquidity conditions even further in Saudi Arabia, the Middle East's largest economy, said Standard Chartered Bank analyst Mary Nicola.

"Right now, the global focus has shifted from inflation to growth. In the previous months reserve requirement was slashed from 13 to 10 per cent and now it is seven per cent," Nicola said.

Yesterday's action is the second taken within a month by Sama. In October, the central bank slashed reserve requirements from 13 to 10 per cent and lowered its repo rate by 100 basis points after the US Federal Reserve reduced key interest rates in response to the world financial crisis and worsening economic conditions.

"Here to date, lending from the banks to the private sector has gone up by 33 per cent and since there is a cumulative rise in demand there is a need to address this by adding liquidity into the system," said John Sfakianakis, Chief Economist at SABB in Saudi Arabia.

A Sama spokesperson said the measures took immediate effect.

Brad Bourland, chief economist at Jadwa Research, said the moves are an indirect tactic to boost confidence in the stock market.

"Liquidity is tight for borrowers in Saudi and this is an independent rate cut to send a signal to banks to loosen lending and indirectly boost stock market confidence," Bourland said. The Saudi market has fallen 60 per cent so far this year.

Bourland said Saudi Arabia will release its 2009 government budget in the next few weeks which is expected to be healthy and may boost the stock market.

"The government budget will be healthy and will likely match the normal trend seen in recent years where spending was increased by about 10 per cent year-on-year," he said.

He said the recent decline in oil prices would not impact the budget.

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