Saudi Arabia's central bank said it reduced on Tuesday the reverse repurchase rate by 25 basis points to 0.50 percent to realign it with short-term rates after inflationary pressures eased. “This measure has been taken in view of the easing of inflationary pressures in the domestic economy and ample system liquidity warranting a realignment of the reverse repo rate with short-dated rates,” the Saudi Arabian Monetary Agency (Sama) said in a statement. Reverse repo rate is a discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash), to contract the money supply it increases the repo rates. Alternatively, the central bank decides on a desired level of money supply and lets the market determine the appropriate repo rate. Sama kept the benchmark repurchase rate unchanged at 2 percent. The reverse repurchase rate is the rate at which Sama borrows money from the commercial banks. The last time Sama moved the rates was on January 19 when it halved the reverse repurchase rate to 0.75 percent and reduced the repurchase rate cut to 2 percent from 2.5 percent. Saudi Arabia, which pegs its riyal currency to the dollar, has cut interest rates five times since October as it sought to boost liquidity for domestic credit demand and relieve pressure on interbank markets. Tadawul Share Index closed 2.6 percent higher at 5,444.09 on Tuesday following the Sama announcement. Banks and petrochemicals lead the advance. Samba Financial Group soared 6.8 percent.
