Saudi Arabia raises key interest rates ahead of US

Saudi Arabia raises key interest rates ahead of US
Normally, Saudi Arabia waits until the United States alters interest rates before making its own changes.

Riyadh - Decision 'consistent with monetary stability in the evolving domestic and international monetary conditions'



Saudi Arabia's central bank raised its two key interest rates by 0.25 percentage points in an apparent effort to prevent Saudi money rates from falling far below US rates, which could trigger capital outflows from the kingdom.
The central bank lifted its repo rate, at which it lends to commercial banks, to 2.25 percentage points and its reverse repo rate, at which commercial banks deposit money with the central bank, to 1.75 percentage points.
The timing of the move was unusual. Normally, Saudi Arabia waits until the United States alters interest rates before making its own changes; this time, the Saudis acted almost a week before next Wednesday's US Federal Reserve meeting, which is widely expected to hike US rates by 0.25 percentage point.
In a brief statement, Saudi Arabia's central bank said only that its decision was "consistent with monetary stability in the evolving domestic and international monetary conditions".
But Saudi commercial bankers believe the central bank is keen to prevent a large, negative interest rate spread from opening up with the United States. In recent months, short-term Saudi money rates have faced downward pressure relative to US rates.
On Thursday, the three-month Saudi interbank offered rate was 13 basis points below its US dollar equivalent - the lowest spread since mid-2009, when rates were distorted by the global financial crisis.
At the end of 2016, the Saudi rate was 104 bps above the US rate. A negative spread could increase pressure for Saudi investors to seek higher returns overseas, which authorities are keen to avoid as they seek to fund domestic investment projects.
This was the first time in several years that the central bank hiked its repo rate. In previous monetary tightenings since December 2015, it only raised the reverse repo, limiting upward pressure on money market rates.


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