Saudi cuts deposit rates; may fuel growth, inflation

RIYADH - Saudi Arabia and Bahrain, which peg their currencies to the dollar, lowered their policy deposit rates by 75 basis points on Wednesday, matching a cut in the United States in a move likely to fuel economic growth and inflation.

By (Reuters)

Published: Wed 19 Mar 2008, 5:26 PM

Last updated: Sun 5 Apr 2015, 1:20 PM

However, Saudi Arabia, which has held its riyal at the same rate against the dollar for 22 years, kept its repurchase rate unchanged at 5.5 percent, two bankers told Reuters, reading from a central bank notice.

The United Arab Emirates, the second-largest Arab economy, lowered its repurchase rate -- the rate at which lenders borrow from the central bank -- to 2.25 percent, though lenders do not generally use the measure to set their deposit and lending rates.

Kuwait, the only Gulf oil producer without a dollar peg, left its benchmark discount rate unchanged at 5.75 percent.

A lower reverse repurchase rate of 2.25 percent in Saudi Arabia, the world’s largest oil exporter, is likely to feed into lower borrowing costs for companies, helping fuel economic growth and job creation, said John Sfakianakis, chief economist at HSBC Holding Plc’s Saudi affiliate, SABB.

”You are likely to have higher growth and higher inflation,” said Sfakianakis.

”It’s a price worth paying in a country where 300,000 people are coming onto the job market each year,” said Sfakianakis, who forecasts economic growth accelerating to 5.5 percent this year and average annual inflation to 5.2 percent. Unemployment is at 15 percent, he estimated.

Mirror the US

Dollar pegs force Gulf Arab oil producers to mirror U.S. monetary policy to maintain the relative attractiveness of their currencies.

At a time when the United States is lowering interest rates to revive its economy, Gulf economies are surging on a five-fold increase in oil prices since 2002, fuelling inflation to a record or near-record high.

The decline of the dollar against major currencies has also made some imports more expensive, prompting calls for a revaluation. Kuwait dropped its dollar peg in May. Its currency has since appreciated 8.54 percent.

HSBC Holdings said in a report received on Tuesday that there was a 40 percent chance Gulf states -- the UAE and Qatar in particular -- might makes changes to their foreign exchange policies this year.

“The 40 percent probability of change taking place this year reflects our view that policymakers could yet have their hands forced in what looks to us to be a brewing perfect storm,” Middle East economist Simon Williams wrote in the report.

The storm is a combination of “dollar weakness, falling U.S. rates, high oil earnings and rising inflation”.

Annual inflation in Saudi Arabia rose to 7 percent in January, the highest in at least 25 years, fuelling speculation that the country might revalue its currency or drop the peg altogether to try to lower import costs.

The U.S. Federal Reserve on Tuesday cut its key rate by 75 basis points to 2.25 percent.

Bahrain, the smallest Gulf economy, lowered its benchmark one-week deposit rate by 75 basis points to 2.25 percent. It also cut its overnight deposit rate to 1.75 percent from 2.5 percent, leaving its repurchase rate and the overnight secured rate unchanged at 5.25 percent.

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