Saudi Arabia cuts rates by 50bps to 2.5%

Saudi Arabia's central bank yesterday cut two key lending rates by 50 basis points, as the Kingdom battles the effects of the global financial crisis with an aggressive push to boost domestic liquidity in a country that is key to the region's economic strength.

The Saudi Arabian Monetary Agency's (Sama) decision to cut the repurchase rate and the reverse repurchase rate marked its latest efforts at easing cash flow and supporting private sector growth in the Kingdom.

It came as the Fed was widely expected to cut its key lending rate to help revive the US economy.

Sama lowered the repo rate – the rate at which it lends money to commercial banks – to 2.5 per cent from three per cent, and reduced the reverse repo rate to 1.5 per cent from two per cent, the official Saudi Press Agency reported.

The repo cut was the second such reduction in a month, while the reverse repo cut was the first such step in five months. Sama left unchanged the cash reserve requirement for commercial banks, which had been lowered from 10 per cent to seven per cent on November 23.

"The main reason is to bring down the cost of borrowing for Saudi borrowers," said John Sfakianakis, chief economist at the Saudi British Bank. "They need to do this to help the private sector keep growing at a time when growth is central to the Saudi economy moving forward."

Saudi Arabia, like most other Gulf nations, ties its currency to the US dollar and tends to mirror US rate reductions.

Gulf countries have enacted a number of measures, from guaranteeing deposits to slashing interest rates and pumping money into the economy, to deal with the financial crunch.

Sama's move appeared partly aimed at pre-empting second-guessing as to whether the central bank would match the Fed's expected cuts. But it also could have regional implications, as keeping the Saudi economy chugging along is pivotal for other Arab countries that rely on the Kingdom for investments.

"When the Saudi economy slows down this much, that really hurts everybody," said Sfakianakis. "It is felt in the Middle East."

Saudi Arabia has been weathering the global downturn better than many countries because of its vast oil-fed cash reserves. But the drop in oil prices will result in lower revenues at a time when there are clear signs of strain in the kingdom even as the government pledges to move on with major projects.

Analysts, for example, say that consumer lending for items such as autos has been dropping as banks tighten restrictions amid signs of greater defaults.

A roughly 56 per cent slide in the Saudi stock market this year highlights investor concerns in the Arab world's largest economy. The percentage of the slide is trumped regionally only by bourses in Dubai and Egypt.

Sfakianakis said the Fed's readiness to cut its key lending rate was the "icing on the cake" for Sama.

Ultimately, however, Saudi officials are concerned the global economic meltdown will undercut private sector growth at a time when growth in the oil sector is being threatened by slumping crude prices.

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