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SAMA slashes key rate
Published in The Saudi Gazette on 04 - 05 - 2008

Saudi Arabia, which pegs its riyal currency to the dollar, cut its reverse repurchase rate by 25 basis points on Saturday following a US rate cut, but continued a policy of keeping its benchmark lending rate steady.
The Saudi Arabian Monetary Agency (SAMA) cut the reverse repo rate to 2 percent and left the benchmark repurchase rate at 5.5 percent, bankers in Riyadh said, reading from a central bank circular.
The central bank left its benchmark repo rate unchanged and raised banks' reserves requirement with the aim of slowing credit growth, said John Sfakianakis, chief economist at Saudi British Bank.
“Increasing the reserves requirements for banks means that they have to keep more money in their vaults,'' Sfakianakis said by telephone from Riyadh on Saturday. ``So banks have less money to lend, which is an attempt to curb inflation.''
SAMA also raised banks' reserve requirement to 13 percent from 12 percent, the fourth such move since November when this rate stood at 7 percent, in an apparent bid to curb further inflationary pressure amid soaring prices.
SAMA also raised for the first time in years the rate on time savings deposits for customers to 4 percent from 2 percent, the bankers added, encouraging Saudis to keep their funds in banks rather than spend, driving prices higher.
Inflation in the Kingdom jumped to almost 10 percent in March, its highest in almost 30 years. Rising prices are a key challenge across the Gulf Arab region, where several governments peg their currencies to the weakening dollar. – Agencies
which makes it difficult to counter price pressures with tighter monetary policy.
As governments raise wages and subsidies, they also bring in price controls and tighten 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, as expected, and hinted the move could be the last in a series meant to buffer the economy from a credit crunch and housing downturn. The Federal Reserve has slashed rates seven times by a total of 3.25 percent since September. Dollar pegs compel Gulf states to track U.S. moves to maintain the relative value of their currencies against the greenback.
Saudi inflation almost doubled in the six months to March, driven mainly by surging rents and food prices.


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