RIYADH, (Reuters) – Saudi Arabia’s central bank unexpectedly increased interest rates for the first time in seven months as it moved to catch up with the U.S. Federal Reserve’s monetary policy, currency traders said on Thursday.
The Saudi Arabian Monetary Agency (SAMA) raised the benchmark Repo rate and the reverse Repo rate by 30 basis points to 5.50 percent and 5 percent respectively, four traders in Riyadh and Dubai said, citing a memo sent to Saudi banks.
The memo gave no reasons for the move, they said.
Analysts said SAMA, which keeps the riyal pegged to the dollar, was making up ground lost last year when it declined to match U.S. interest rate hikes during a Saudi stock market crash.
SAMA officials could not immediately be reached for comment on Thursday, which is not a working day in Saudi Arabia.
News of the last Saudi rate hike in June also first broke among currency traders in Dubai, where Thursday is a working day. SAMA confirmed that move later in the day.
Saudi Arabia and five other Gulf Arab states have pegged exchange rates to the dollar to prepare for monetary union and most regional central banks track the Fed’s policy moves to maintain the relative yield appeal of their currencies.
U.S. interest rates stand at 5.25 percent after 17 consecutive quarter point increases that ended in June.
The Saudi central bank moved out of step with the Fed early in 2006 as the Riyadh stock market crashed. By the time of SAMA’s June tightening the largest Arab bourse had stabilized somewhat after losing half its value between February and May.
SAMA may have been waiting for Fed interest rate cuts to restore the balance and only moved when market expectations for U.S policy easing early this year receded, the traders said.
“Saudi was deviating from the Fed. Before Saudi was guided by its own consideration with equity markets and oil prices now they need to align it with the dollar,” said Rohit Kedia, a trader at Emirates Bank in Dubai.
“If they are going to move toward a currency union, the (Gulf states) must be in line on interest rates.”
Although Saudi Arabia’s inflation rate is the lowest in the Gulf, price pressures are building. Annual inflation as measured by the cost of living index rose to 2.8 percent in November.
The non-oil GDP deflator, which economists say is a better measure of inflation than the consumer price index, rose 2.1 percent in 2006 after going up 1.14 percent in 2005, the finance ministry said in December.
“They do have some flexibility in interest rates but not a huge amount. The concern that all the Gulf Arab states have got is that because of their link to a weak dollar, they are importing inflation,” Richard Fox, head of Middle East and Africa sovereign ratings at Fitch Ratings, said in London.