Saudi Arabia's central bank on Tuesday cut by a third the interest rate it pays to commercial banks for deposits but kept its benchmark repurchase rate unchanged in a bid to spur more lending to businesses and households. The reverse repurchase rate was cut by 25 basis points to 0.50 percent while the benchmark repurchase rate stayed at 2 percent, the Saudi Arabian Monetary Agency (SAMA) said.
"This measure has been taken in view of the easing of inflationary pressures in the domestic economy and ample system liquidity warranting a realignment of the reverse repo rate with short-dated rates," it said. The move is likely to push commercial banks into action, said John Sfakianakis, chief economist at HSBC's Saudi subsidiary.
"This will force banks to deposit less money with the central bank, therefore increasing the possibility of greater lending," he said. "The onus is now on the banks and the private sector." With oil receipts plummeting, Saudi Arabia has sought to ease liquidity in its financial markets and prop up sagging investor confidence with a wide array of policy measures since the global credit crisis deepened in late September.
The repurchase rate of 2 percent is down from 5.5 percent last October, while the reverse repo rate is down from 2.5 percent and reserve requirements for banks making deposits have almost halved. Those measures lowered the interbank lending rate by almost half but private sector firms continued to complain of tight bank lending. Bank claims on the private sector, for instance, rose by only 2.33 billion riyals in February compared to their level at the end of September.
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