Saudi Arabia slashed interest rates on Tuesday ahead of a US Federal Reserve policy announcement as it strives to boost liquidity but the United Arab Emirates said it would not ease rates for now.

A global financial meltdown has put the brakes on a six-year oil-fuelled boom across the Gulf Arab region, prompting policymakers to take a slew of measures to defrost money markets and restore investor confidence.

In the latest step on Tuesday, the Saudi Arabian Monetary Agency (Sama) reduced its repurchase rate by 50 basis points to 2.5 per cent, the fourth reduction in its benchmark lending rate since the global financial crisis intensified in October.

Sama also cut its deposit rate, the reverse repurchase rate, for the first time since April to 1.5 percent from 2 percent, saying the cuts aimed to ensure adequate liquidity to meet domestic credit demands.

"The central bank is concerned the private sector won't be able to follow through with project financing commitments," said Paul Gamble, head of research at Riyadh-based Jadwa Investment.

"They really want to send a signal to the banks that they should make sure they will lend."  The Fed is expected to cut rates by 50 basis points to 0.5 percent on Tuesday, and most states in the oil-exporting Gulf  have tended to shadow American interest rate policy to maintain the relative value of their dollar-pegged currencies.

But in the past few months, Gulf central banks have been cutting lending interest rates more than usual as they strive to defrost interbank markets and encourage private sector borrowing to keep their economies growing during an oil price slump.

The Gulf had been keeping lending rates high as it battled record inflation this year and last.  With inflationary pressures receding, the emphasis has shifted to alleviating the impact of the global financial crisis by slashing interest rates, guaranteeing bank deposits, supporting stock markets and pouring funds into banking systems.

The United Arab Emirates has been particularly active, with the central bank and finance ministry together launching Dh120 billion ($33 billion) of emergency funding since September to help banks cope with tight credit conditions.

No UAE cut

The UAE minister of state for finance also reaffirmed on Tuesday the government's promise to guarantee bank deposits, and said a law would be enacted soon to entrench that right.

But while three-month Saudi market rates have fallen more than 160 basis points in the past month as a result of policy responses, the three-month Emirates Interbank Offered Rate has held around 4.4 percent.

"No, we will not cut," UAE Central Bank governor Sultan Nasser al-Suweidi told reporters in the UAE capital when asked if the country would match a likely Fed rate cut on Tuesday.

That would be the second time since late October the UAE refrains from mirroring the Fed. Its benchmark overnight repurchase rate is 1.5 percent and the Fed is likely to slash its key policy rate to 0.5 percent on Tuesday, according to analysts in a Reuters poll this month.

"The UAE benchmark lending rate is substantially below the lending rates of other GCC central banks and any cuts in the benchmark rate will have limited impact on reducing the interbank rate," EFG-Hermes said in a note on Tuesday.

The Gulf has massive infrastructure projects under way designed to diversify its economy away from relying on oil export revenues. Oil prices have tumbled more than $100 a barrel since hitting record levels above $147 a barrel in July.

Many of these projects are public-private partnerships - but private investors are finding it difficult during the global credit crunch to access abundant and cheap funds.

"By bringing down both rates, Sama is trying to force aggressively down the cost of borrowing for Saudi corporates," said John Sfakianakis, chief economis