RIYADH, 25 November 2007 — Saudi Arabia cut some borrowing costs yesterday to relieve pressure on its dollar-pegged currency that has mounted on growing bets that Riyadh will allow the riyal to appreciate, bankers said.
The Saudi Arabian Monetary Agency (SAMA), the central bank of the world’s largest oil exporter, reduced the reverse repurchase rate by 50 basis points to 4.25 percent, three bankers in Saudi Arabia and the United Arab Emirates said.
Investors have piled into the riyal in the last week since a source familiar with Saudi policy told Reuters the country could consider revaluing its currency for the first time since 1986, when it pegged the riyal to the dollar at 3.75.
The reverse repo rate is used by banks to set deposit rates, so cutting the rate would make bets on exchange-rate appreciation less attractive, bankers said. The central bank kept its benchmark repurchase rate, which banks use to determine lending rates, unchanged at 5.5 percent.
“They are doing this to calm down the market and prevent speculation on the local currency,” said John Sfakianakis, chief economist at SABB, HSBC’s Saudi affiliate. “Investors will find it less attractive to hold deposits in riyal,” he said.
The Saudi riyal hit a 21-year high on Thursday of 3.70 and investors are betting on an appreciation of as much as 3.2 percent appreciation in the riyal in a year, according to forward rates yesterday.
Saudi Arabia’s move follows similar rate cuts in the UAE on Thursday, when the central bank cut its six- to 18-month certificate of deposit rates by as much as 20 basis points to make holding dirhams less attractive.
UAE Central Bank Gov. Sultan Nasser Al-Suweidi said on Nov. 15 he was under mounting social and economic pressure to drop the dirham’s peg to contain inflation, which hit a 19-year high of 9.3 percent last year.
Forward rates yesterday showed investors betting on a 2.9 percent appreciation in the UAE dirham, down from more than 3 percent before the Thursday rate cut.
“The Saudi and UAE moves are not surprising given the amount of pressure on the currencies,” said Jason Goff, head of group treasury and market sales at Emirates Bank International Ltd.
Officials at the Saudi central bank could not be reached to confirm the rate cut. The bank usually communicates its interest rate decision to banks and confirms them in a statement, sometimes several days later.
Saudi Arabia has reduced its reverse repo rate two times this month but has declined to lower lending costs following two US Federal Reserve rate cuts in September and October. Saudi inflation hit a decade high of 4.89 percent in September.
Rate cuts in the Saudi Arabia and the UAE may not have a dampening affect on speculation that the two states, as well as Qatar, Bahrain and Oman, will be forced to either give up their dollar pegs or allow currencies to appreciate, analysts said.
With Gulf economies surging on a near fivefold jump in oil prices since 2002 and the US Federal Reserve cutting interest rates, Gulf countries risk stoking inflation at decade-highs if they track US monetary policy.
