GCC tracks US rates, no further hike seen in Saudi Arabia

Analysts see move last week as aimed at preventing capital outflow

Saudi Arabia has not announced any changes to its benchmark rates so far and analysts do not expect a further hike in rates immediately on the pre-emptive rate hike Saudi Arabian Monetary Authority (SAMA) announced on March 15.

Analysts said the unusual move last week was aimed at preventing capital outflow resulting from interest rate differential. SAMA is expected to keep its benchmark policy rates steady with the repo rate at 2.25 per cent and the reverse repo rate at 1.75 per cent.

“We view SAMA’s March 15 rate hike as a pre-emptive move ahead of the Fed, aimed at highlighting its commitment to raising its repo with the Fed rates and reducing Saibor’s [Saudi Arabia interbank offered rate] discount to Libor,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.

Bankers say continuation and/ or widening of Saibor discount could result in capital outflows or a shift in deposits from the Saudi riyal to the dollar which led to an early increase in rates.

Despite the unusual out of turn rate hike by SAMA last week analysts expect the Saudi central bank is sensitive to the growth impact of higher interest rates. They say SAMA will still try to contain the pace of interest hikes given the lacklustre economic backdrop in Saudi Arabia. The need for loose monetary conditions was a key factor behind SAMA keeping the repo rate steady so far.