Saudi Arabia Follows Fed With Rate Increase as Oil Slumps

Saudi Arabia raised interest rates for the first time since 2009, matching the U.S. Federal Reserve’s move even as oil revenue slumps and economic growth is slowing.

The world’s biggest oil exporter increased the reverse repo rate by a quarter-point to 0.5 percent. The change was “in line with domestic and international financial market conditions,” the Saudi Arabian Monetary Agency said, according to the official Saudi Press Agency. The central banks of the United Arab Emirates, Kuwait and Bahrain also raised rates.

The increase comes as the kingdom is fighting a costly war in Yemen and the price of oil, the nation’s main source of income, plummeted to the lowest since 2008. Economic growth may slow to 3.1 percent this year from 3.5 percent in 2014, according to the median of 12 estimates compiled by Bloomberg.

“It doesn’t come at an ideal time” for the six Gulf Cooperation Council nations, Razan Nasser, senior Middle East and North Africa economist at HSBC Holdings Plc, said by phone from Dubai. “We are already seeing a slowdown as the result of the drop in oil prices, and the broader impact that it is having on the economy overall.”

The Saudis have led OPEC in maintaining output and defending market share against higher-cost producers. With Brent crude prices falling about 40 percent in the past 12 months, Saudi Arabia tapped the bond market for the first time since 2007 this year to help fund its budget deficit. It planned to raise as much as 100 billion riyals ($27 billion) by the end of

2015.

Growing Pressure

The drop in the government’s revenue has reduced its deposits at banks, tightening liquidity and forcing lenders to raise borrowing costs. The three-month Saudi Interbank Offered Rate soared this year to 1.26625 percent as of Dec. 16, the highest in almost seven years.

Now, there will be even tighter monetary policy, weighing “on growth even more,” Nasser said.

The financial pressure has led to speculation that Saudi Arabia may have to abandon the dollar peg, though policy makers insist they won’t. The kingdom’s net foreign assets slid to a three-year low in October; one month later, forward contracts used to speculate on the Saudi Arabian riyal in the next year jumped to the highest since 1999.

Most of the GCC nations peg their currencies to the dollar and typically follow the Fed’s interest-rate moves.

Kuwait raised its key interest rate a quarter-point to 2.25 percent, and Bahrain increased its overnight deposit rate to 0.5 percent from 0.25 percent. The U.A.E. raised its rate on certificates of deposits in line with the U.S. decision.

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