DUBAI (Reuters) – Saudi Arabia and other Gulf oil exporters cut some interest rates on Thursday to make bets on revaluations of their dollar-pegged currencies less attractive after the Federal Reserve reduced U.S. borrowing costs.
The Saudi riyal hit a three-week low after the central bank of the world’s largest oil exporter cut its reverse repo rate by 25 basis points. Kuwait, Bahrain and the United Arab Emirates also reduced some rates.
Most of the moves reflected concerns about rising inflation at home. Kuwait and Saudi Arabia left their benchmark rates unchanged and the UAE reduced its key rates by as much as 20 basis points. Only Bahrain matched the Fed’s quarter percentage point easing with its main policy rate.
“They are doing the minimum that they have to because of the pegs,” said Marios Maratheftis, Standard Chartered’s regional head of research.
The Saudi central bank, concerned about quickening inflation at home, opted to ignore the last Fed cut on Sept. 18, firing market speculation of an imminent revaluation that drove the riyal to a 21-year high.
Bids on the riyal fell as low as 3.7430 per dollar, its weakest since Oct. 8, after the Saudi rate cut. The central bank has officially kept the riyal stable at 3.75 to the dollar since June 1986, although on the market its latest 21-year peak was 3.7290 on Oct. 10.
The Saudi central bank also raised the reserve requirement for banks to 9 percent from 7 percent, to make sure that lower borrowing costs would not fuel lending and stoke inflation that hit a seven-year high of 4.4 percent in August.
“This means that banks will have to keep more money in their vaults rather than release them in the system,” said John Sfakianakis, chief economist at SABB bank, one of the bankers who had seen the central bank statement.
A central bank spokesman said he could not immediately comment on any of the moves. The Saudi central bank usually communicates its policy decisions to banks and confirms them in a statement, sometimes several days later.
Saudi Arabia’s dilemma mirrors that of central banks around the region, which are torn between discouraging currency appreciation and controlling inflation in economies booming on a quadrupling of oil prices since 2002.
“The focus is likely to be on the domestic side and the inflationary side,” said Monica Malik, senior economist at Cairo-based EFG-Hermes investment bank.
Kuwait’s central bank, which dropped its dollar peg in May, reduced the repurchase rate by 25 basis points to 4.5 percent but left the benchmark discount rate unchanged at 6.25 percent.
Gulf central banks usually track U.S. monetary policy to maintain the relative yield on their currencies. The Fed cut on Wednesday takes the gap between returns investors get on the Saudi riyal and dollar to its widest since 2002.
The Saudi central bank left its benchmark repurchase rate unchanged at 5.5 percent with the U.S. federal funds rate at 4.5 percent. The average rate spread over the past 15 years has been 36 basis points, according to Deutsche Bank.
The last U.S. interest rate cuts divided the six Gulf Arab states that had agreed to keep their currencies pegged to the dollar until monetary union in 2010.
Oman and Bahrain joined Saudi Arabia in ignoring the Sept. 18 Fed move. Qatar and the UAE cut some key rates along with Kuwait, which now tracks the dinar against a basket of currencies.
Qatar has yet to announce a change in its policy rate. Oman’s central bank is closed on Thursdays.
Inflation in the UAE was 9.3 percent in 2006, a 19-year high, 12.8 percent in Qatar in June, 4.98 percent in Kuwait in July, near a 12-year high, and 6.47 percent in Oman in August, a 16-year high.