RIYADH: Saudi Arabia and its regional peers raised interest rates following the US Federal Reserve's decision to hike its benchmark level by an expected 50 basis points as the world continues to battle rising inflation.
The Saudi Central Bank, known as SAMA, raised the rates of both the Repo and Reverse Repo by 50 basis points to 5 percent and 4.50 percent respectively. It said this decision is in line with the central bank’s objectives of maintaining monetary stability and supporting financial stability.
The Federal Reserve on Wednesday raised its interest rate by half a percentage point to reach a targeted range between 4.25 percent and 4.5 percent, the highest level in 15 years.
The Federal official indicated that they expect to keep rates higher through next year, with no reductions until 2024.
The Fed’s hike “is a partly welcomed development after witnessing a total of seven rate hikes with four consecutive 75 bps hikes this year,” Albara'a Al-Wazir, an economist at the US-Saudi Business Council, told Arab News.
On the one hand, he said it appears as though the most acute phase of quantitative tightening might be “behind us.”
“While on the other hand, there are still sizeable concerns given that the US inflation rate is still high at 7.1 percent,” said Alwazir, adding that competing forces such as a tight labor market coupled with an increase in wages entail future interest rate increases, albeit at a slower pace into 2023.
The repo rate is primarily used as a tool to control inflation, charged when commercial banks borrow funds by leveraging securities, whereas the reverse repo — the rate at which banks earn interest when they park surplus funds — is used to increase liquidity.
Alwazir noted that the interest rate hike will result in lower demand for credit, thus having adverse effects on financial assets as witnessed throughout the year.
“This will exert further downward pressure on Tadawul’s performance, where the Tadawul All Share Index is already down 9 percent year to date.”
Hikes by the Gulf Cooperation Council nations, whose currencies have been pegged to the dollar for over 35 years, are as follows:
Oman’s central bank raised its Repo rate by 50 basis points to 5 percent on Thursday, and announced that it continues to monitor global and local markets closely to take necessary actions.
Qatar’s central bank too increased deposit, Repo, and lending rates by 50 basis points to reach 5, 5.25 and 5.5 percent respectively.
The Central Bank of Bahrain raised its key policy interest rate, overnight deposit rate, four-week deposit rate and lending rates by 50 basis points each, to 5.25 percent, 5 percent, 6 percent and 6.5 percent respectively.
The UAE's central bank raised the Base Rate applicable to the overnight deposit facility by 50 basis points, from 3.9 percent to 4.4 percent.
Saudi Arabia, the UAE, Bahrain and Qatar responded to the Fed’s hikes by rising their main policy rates simultaneously and largely by the same amount in 2022.
The Gulf nations hiked their rates in March, May, June, July, September and November, in line with the Fed’s move to raise interest rates.
Kuwait, which differs from its Gulf counterparts in its peg to a basket of currencies, has been taking a different approach reflecting a rather bullish outlook on inflation.
In the months of May and June, as other Gulf states raised their rates by 50 basis points, Kuwait raised its rate by only 25 basis points.
In November, Kuwait abstained from rate hikes, whereas Saudi Arabia, the UAE and Bahrain increased rates by 75 basis points at the time while Qatar raised rates by 50 basis points.