The Saudi Central Bank (SAMA) announced, in an official statement, a decision to reduce the repurchase agreement rate (repo) by 25 basis points to 4.25%, in conjunction with reducing the reverse repurchase agreement rate (reverse repo) by the same percentage to 3.75%.
The bank explained in its statement that this decision comes in response to the accelerating global economic developments, and is consistent with the central bank’s main objective of maintaining monetary and financial stability in the Kingdom of Saudi Arabia.
The link between monetary policy and the US dollar
This move by the Saudi Central Bank typically coincides with decisions made by the US Federal Reserve (the US central bank). Since the Saudi riyal is pegged to the US dollar at a fixed exchange rate (3.75 riyals to the dollar), Saudi monetary policy often moves in tandem with US monetary policy. This alignment aims to maintain the attractiveness of the Saudi riyal, prevent capital outflows in search of higher returns, and ensure exchange rate stability, which is a cornerstone of the Saudi economy.
Expected local economic impacts
The reduction in interest rates is expected to have a positive impact on the Kingdom's local economy, as lowering repo and reverse repo rates reduces interbank lending costs, which in turn lowers the cost of financing and loans for businesses and individuals. The anticipated effects include:
- Stimulating investment: Lower borrowing costs encourage private sector companies to expand their projects and increase their capital investments, which supports the growth of non-oil GDP, a key objective of the Kingdom’s Vision 2030.
- Supporting mortgage finance: Lowering interest rates may stimulate the mortgage finance sector, as housing loans become less expensive for citizens, thus boosting homeownership rates.
- Increased liquidity: The decision helps provide more cash liquidity in the markets, which stimulates commercial and consumer activity.
Economic concepts: Repo and reverse repo
To clarify, the repo rate is the rate at which the central bank lends to commercial banks for short periods, thus affecting the liquidity available to banks. The reverse repo rate, on the other hand, is the rate at which commercial banks pay the central bank to deposit their excess funds with it. These instruments are the primary tools used by the Saudi Arabian Monetary Authority (SAMA) to manage liquidity in the banking system and control interbank interest rates (SAIBOR).
In conclusion, this decision confirms the flexibility of the Kingdom’s monetary policy and its ability to adapt to global changes in a way that serves the national economy and maintains its stability.
