Sama lowers reverse repo rate as stimulus measures falter

The Saudi Arabian Monetary Authority (Sama) yesterday lowered its benchmark reverse repo rate in response to data that showed the Kingdom's monetary stimulus measures have not trickled down to the economy.

Gulf rates are unlikely to rise anytime soon.

The reverse repo rate was cut from 0.50 per cent to 0.25 per cent, bringing it in tune with the US Fed Funds Target Rate (FFTR). The Saudi riyal is pegged to the US dollar. However, Sama left the repo rate unchanged at 2.00 per cent. "This measure has been taken to normalise domestic money market conditions against the backdrop of stable macroeconomic activity," Sama said in a statement.

"Given that the business cycle has turned and that the economy is in a downturn, it would benefit from higher credit growth. Reducing the reverse repo rate will reduce the returns commercial banks make by keeping funds with the central bank, thereby encouraging them to resume lending," Marios Maratheftis, Standard Chartered bank's Head of Research said, in a note sent to Emirates Business.

"This will be positive for the economy," he said.

Although liquidity conditions have improved dramatically since the crunch experienced in H2-2008, as evidenced by a sharp fall in interbank rates, in Saudi Arabia in particular, financial conditions are still in the process of normalising, and are unlikely to put upward pressure on the GCC's interbank rates anytime soon, said Delphine Arrighi, Fixed Income Strategist at SCB.

With their currencies pegged to the US dollar, GCC central banks have followed the Fed's monetary policy. There has, however, been divergence in the past.

Recently, both Sama and the UAE Central Bank have kept their policy rates slightly above the FFTR, reflecting the region's stronger economic outlook.

"Although we expect 2009 GDP growth to be significantly higher in the GCC than in the US [one per cent in Saudi Arabia and 0.5 per cent in the UAE, versus a negative three per cent in the US], inflation has receded from its 2008 average on the back of lower commodity prices and the collapse of the realty sector," Arrighi said.

"We now expect inflation to average three per cent in Saudi Arabia and 2.5 per cent in the UAE this year, leaving both central banks in no hurry to raise rates in 2009." While the gap between loans and deposits at UAE commercial banks reportedly narrowed to Dh36.1 billion at the end of April from Dh71.2bn at the end of December 2008, "this merely reflects banks' more cautious approach to lending and higher costs for borrowers, and still points to tight credit conditions" in the region, said Arrighi.

The surge in lending to the private sector seen in 2008 has lost momentum, and has actually reversed in some cases, as a crisis of confidence has hit the banking sector, Arrighi said.

Tighter credit conditions are also reflected in the deterioration of Sama's business confidence index to 88.3 in May from 89.2 in April.

With a recovery expected in the GCC earlier than in the US, "we expect rate hike expectations to materialise earlier in the GCC than in the US, and the region's interbank rates to edge up before USD Libor", she said.

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