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Saudis Raise Key Rate in First Move Since 2009 Ahead of Fed

Updated on
  • Central bank raised repo and reverse repo by 25 basis points
  • Pre-emptive action is first time repo rate changed since 2009

Saudi Arabia preemptively raised its key interest rates on Thursday ahead of an expected tightening by the Federal Reserve.

The kingdom increased its repurchase and reverse repurchase rates by 25 basis points each, to 225 and 175 basis points respectively, the Saudi Arabian Monetary Authority, known as SAMA, said in a statement. While the reverse repo rate has been raised over the past two years in step with U.S. rate changes, it’s the first time the kingdom has changed the repo rate since 2009.

The move comes as Saudi interbank rates, for the first time since the global financial crisis in 2009, are below their U.S. dollar equivalent in London. On Thursday, the difference was 14.5 basis points. Economists say the discount could result in capital outflows or deposits being shifted from Saudi riyals to U.S. dollars.

“The rate hike represents a change of track for SAMA which tended to follow rather than preempt the Fed,” said Ziad Daoud, chief Middle East economist for Bloomberg Economics. “The move is probably motivated by concerns over the risk of capital flight as the Saudi 3-month interbank rate continued to fall below its U.S. counterpart.”

Oil Rise

Saudi Arabia follows U.S. monetary policy because its currency is pegged to the dollar. Historically, borrowing rates in the kingdom have been higher than those in the U.S. -- by more than 150 basis points as recently as 2016. At the time, the oil price rout was pushing Saudi officials to draw down government deposits to plug a ballooning budget deficit and tight liquidity in the banking system threatened to add to the economic strain.

Since then, liquidity has increased significantly. Over the past two years, the government has turned to international and domestic bond sales, while Brent crude prices have risen, easing the pressure on state finances.

Last week, the central bank suspended the use of 7-day, 28-day and 90-day repurchase agreements that were rolled out during the liquidity crunch two years ago. However the spread between Saudi interbank rates and the U.S. dollar equivalent continued to gradually widen.

“We see this move by SAMA as an attempt to remove the discount” between the rates, said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Moving ahead of the Fed indicates a commitment to raise rates.”

(Updates with economist quote, context from fourth paragraph.)
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