Saudi Arabia keeps rates on hold

The Saudi central bank kept interest rates unchanged in the third quarter, it said yesterday, viewing a further rate cut as unlikely to spur lending while a rate increase was unnecessary given tepid inflation in the country.

The Saudi Arabian Monetary Agency (Sama), the central bank, said it held its main rate at two per cent because of declining inflation and a need to support lending in the banking sector hit by debt restructuring concerns in family firms.

The reverse repo rate stayed at 0.25 percent.

The bank does not announce interest rate changes publicly, but communicates them directly to commercial banks in the kingdom. At times it publishes its decisions over a certain period.

It has slashed its benchmark lending rate by 200 basis points over the past year as an oil price collapse sent the top Arab economy into a downturn and inflation fell from record highs.

Analysts said the Saudi easing cycle was probably over for now and the central bank also needs to watch for potential signs of inflationary pressures after consumer prices rose for the first time in four months in September.

The kingdom, which pegs its currency to the US dollar, has to keep its monetary policy synchronised with the US Federal Reserve to prevent speculative pressures on the riyal currency.

The US federal funds rate stands at 0.25 per cent.

Sama last changed the key rate in January, when it cut it by 50 basis points.

It halved the reverse repo rate in June in a bid to discourage banks from placing money at its accounts.

"They kept interest rates low for quite some time now. But banks have not been lending because of risk aversion," said John Sfakianakis, Chief Economist at Banque Saudi Fransi-Credit Agricole.

"In the case of a rate increase, they need to have more data… a few more months of steep inflation increase, which would make them take action."

The annual inflation rate in the world's largest oil producer stood at 4.4 per cent in September, down from 10.4 per cent a year ago.

Sama's data showed that credit growth almost came to a halt in September. Loans to the private sector rose by SR17 billion (Dh16.6bn), a very modest performance compared with 2008. Reserve requirements on demand deposits remained at seven per cent, the central bank said in a statement.

Sama has not conducted any foreign exchange swap deals with local banks because they had enough US dollar liquidity, it added.

Sama has not conducted any foreign exchange swap deals with local banks since the fourth quarter of 2008.

"This is due to the slowdown affecting project finance especially for the private firms which has been virtually dry in 2009 and also reflects cautiousness towards the dollar," a Riyadh-based foreign exchange trader said.

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