RIYADH, (Reuters) – Saudi Arabia last week raised bank reserve requirements to 12 percent from 10 percent to stem a surge in inflation, the third move of its kind since November, traders said on Monday.
“The increase took effect on April 1,” one trader said on condition of anonymity. The Saudi central bank bans banks from talking to media about its monetary policy memos.
The reserves move forces banks to keep more money in their vaults, slowing growth in money supply in the world’s largest oil exporter.
The central bank, known as the Saudi Arabian Monetary Agency (SAMA), raised the reserve ratio to 9 percent from 7 percent in November and increased it again in January to 10 percent.
“The memo did not explain the move, as usual,” a treasurer at a local bank said. “But obviously they are very concerned about the relentless rise in money supply, in spite of steps taken in the past to slow it down,” he added.
Officials at SAMA could not be reached immediately for comment.
Money supply grew at 23.9 percent year-on-year in January, its highest in at least four years, versus annual growth of 19.6 percent in December.
John Sfakianakis, chief economist at SABB bank, HSBC’s Saudi subsidiary, said money supply will now grow at a more measured pace but will still add to inflationary pressures, already stoked by government spending from record oil receipts.
“SAMA wants to curb inflation without capping spending by the government. SAMA … wants to contain money supply,” he said.
Increasing the reserve requirements will indirectly hit local banks, he added. “But this impact will not be severe,” he added.
April’s reserve requirement increase took effect the same day the government slashed import tariffs on 180 basic goods after inflation almost doubled in the six months to February to reach 8.7 percent, a 27-year peak.
Saudi Arabia has said it is committed to pegging its riyal currency to the dollar, even though the U.S. currency’s persistent decline through record lows against the euro is driving up import costs.
Most countries in the GCC, which also includes the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman, are preparing for monetary union as early as 2010.
Inflation is accelerating across the region as its economies surge on a five-fold rise in oil prices in the last six years, which is driving state investment in infrastructure and real estate.