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Saudi cuts reverse repo rate after Fed decision.

RIYADH: Saudi Arabia, which pegs its currency to the dollar, reduced its reverse repurchase rate by 25 basis points yesterday after a US interest rate cut this week, but left its benchmark lending rate steady.

The Saudi Arabian Monetary Agency (SAMA) cut the reverse repo rate to 2 per cent from 2.25pc and continued a policy of leaving its benchmark repurchase rate at 5.5pc, according to a SAMA circular sent to banks.

SAMA also raised banks' reserve requirement to 13pc from 12pc, the fourth such move since November when this rate stood at 7pc, in an apparent bid to curb further inflationary pressure amid soaring prices.

It also raised for the first time in years the reserve requirements banks have to make for time and savings deposits to 4pc from 2pc, according to the memo.

"SAMA is trying to take some liquidity off the market by raising reserve requirements ... They are looking at banking system measures to deal with liquidity," HSBC's Saudi subsidiary SABB bank's chief economist John Sfakianakis said.

"They are telling the banks to keep more money in their vaults but whether this will reduce inflation remains to be seen," he added.

Saudi banks will not be able to use an annual 18.5 billion riyals ($4.93bn) as a result of the two increases in reserve requirements, according to Sfakianakis' estimates.

"At the end of the day, SAMA is trying to address the issue of inflation by curtailing as much as possible the liquidity issue," he said.

"The cost of funding could increase in a somewhat tighter lending environment but SAMA's priority is inflation."

Inflation in the kingdom jumped to almost 10pc in March, its highest in almost 30 years, raising pressure on the state to offset price pressures on the population of 25 million.

Inflation is a key challenge across the Gulf region, where governments which peg their currencies to the ailing dollar are raising wages and subsidies, bringing in price controls and tightening lending curbs to dampen the impact of price rises on ordinary consumers.

Flush with liquidity from record oil receipts, Saudi Arabia has recently been cutting the reverse repurchase rate instead of the repurchase rate to avoid fuelling further inflation as it tracks the Federal Reserve moves.

The Federal Reserve lowered US interest rates by a quarter percentage point this week and hinted it could be the last in a series aimed at shielding the economy from a credit crunch and housing downturn.

Saudi inflation almost doubled in the six months to March, driven mainly by surging rents and food prices.

Subsidies aimed at helping lower-income Saudis, state employee cost-of-living allowances and lower import levies on various food items are among measures Saudi Arabia has introduced to help consumers cope with rising inflation.

With the dollar tumbling this year to record lows against the euro and a basket of major currencies, some imports have become more expensive.

The Saudi central bank communicates interest rate decisions only to banks, sometimes confirming them to the public.

Copyright [c] 2008 Gulf Daily News

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Publication:Gulf Daily News (Manama, Bahrain)
Date:Jun 11, 2008
Words:517
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