Saudi Arabia makes rare repo rate cut amid crisis

The Saudi Arabian Monetary Agency (SAMA), the kingdom's central bank, cut the repo rate to 5 per cent from 5.5 per cent. It also lowered reserve requirements to 10 per cent from 13 per cent, bankers said citing a memo sent to their treasuries.

"SAMA's memo said inflationary pressures have started to show signs of easing and that domestic demand on credit has continued to be brisk," the head of a treasury at a local bank told Reuters.

Inflation eased to 10.9 per cent in August from a 30-year peak of 11.1 per cent in July.

SAMA economist Fadi Alajaji told Reuters last Tuesday that the kingdom may lower the benchmark lending rate if convinced the monetary system is running out of cash. He also said the central bank faced problems managing liquidity while at the same time controlling inflation.

A day later, SAMA's vice governor Muhammed al-Jasser said SAMA was ready to provide sufficient liquidity if needed but no bank had approached it for additional funds. He noted however that there was no need to provide emergency funds to banks as the financial sector faced no shortage in liquidity.

The kingdom, which pegs its currency to the dollar, has not lowered the repo rate, its benchmark lending rate, since February 2007.

Flush with liquidity from record oil receipts, the world's largest oil exporter has been cutting the reverse repurchase rate recently, instead of the repurchase rate, to avoid fuelling inflation as it tracks the US Federal Reserve.

But the picture had changed drastically in the past six months as SAMA nearly doubled reserve requirements banks have to make over the past 11 months to mop up liquidity and avoid stoking the inflationary pressures that began to anger ordinary Saudis.

This has led to a surge in financing costs, especially for medium- and long-term maturities at a time when the kingdom has endeavoured to make the most of the oil boom and provide jobs for a rapidly-growing population through giant infrastructure and industrial projects. 

Follow Emirates 24|7 on Google News.