Saudi cuts rates again to boost liquidity
Riyadh, November 23, 2008
Saudi Arabia's central bank slashed its benchmark lending rate by 100 basis points on Sunday, the second reduction in a month to keep credit markets moving and boost domestic liquidity after inflation receded.
The Saudi Arabian Monetary Agency (Sama) reduced the repo rate to 3 percent from 4 percent and cut the cash reserve requirement local banks have to make on demand deposits to 7 percent from 10 percent, a Sama spokesperson said, citing a circular from the central bank.
"These measures are taken against the backdrop of receding inflationary pressures and ensuring that adequate system liquidity is available to meet steady domestic demand", the circular said.
Two bankers estimated the reserve change will release about $2.4 billion to commercial banks -- funds held in the central bank as cash reserves.
Despite being flush with oil revenues, economies in the Middle East are starting to feel the impact of the global financial crisis, which is freezing up credit markets, roiling stock markets and undermining economic growth.
"Sama needed to do this to add liquidity so that there is additional credit that flows to the private sector. The availability of credit has reached limitations in terms of asset to deposit ratios of local banks while demand is growing," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi subsidiary.
Prior to Sunday's cuts, Sama reduced on Oct. 12 the repo rate to 5 percent from 5.5 percent and the reserve requirement to 10 percent from 13 percent. About ten days later, it cut the repo rate by 100 basis points to 4 percent. Inflation eased to 10.35 percent in September from 10.9 percent in August. - Reuters