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Saudi slashes rates ahead of Fed; UAE to opt out

Saudi Arabia slashed interest rates on Tuesday ahead of a US Federal Reserve policy announcement while the United Arab Emirates said it would not track Fed easing as the Gulf grapples with a global liquidity crunch.

In an apparent pre-emptive move, Saudi Arabian Monetary Agency (SAMA) reduced its benchmark repurchase rate by 50 basis points to 2.5%, the fourth time it has reduced the rate since the global financial crisis intensified in October.

The Fed is expected to cut rates by 50 basis points to 0.5% on Tuesday, according to a Reuters poll this month.

Most states in the oil-exporting Gulf peg their currencies to the US dollar and have tended to shadow American interest rate policy to maintain the relative value of their currencies.

But in the past few months, Gulf central banks have been cutting interest rates more than usual as they strive to defrost interbank markets and encourage private sector borrowing to keep their economies growing during the global financial turmoil.

On Tuesday, SAMA also cut its reverse repo rate to 1.5% from 2%.

“By bringing down both rates, SAMA is trying to force aggressively down the cost of borrowing for Saudi corporates,” said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate.

“Banks can no longer justify high rates,” he said, adding SAMA wanted to force interbank rates “aggressively” lower.

SAMA said it had reduced rates “in line with recent monetary measures taken by SAMA to ensure adequate system liquidity to meet genuine domestic credit demand and in view of evolving global development.”

Gulf states are expected to expand public spending as they strive to keep multi-billion-dollar infrastructure projects on track amid an oil price slump. But hefty borrowing costs are discouraging private investors from taking part.

“There is a desire by policymakers to reverse the decline in economic activity and the way to do that is monetary and fiscal policy easing,” said Giyas Gokkent, head of research at National Bank of Abu Dhabi.

Three-month Saudi interbank rates have fallen more than 160 basis points in the last month as SAMA slashed interest rates and reduced bank reserve requirements to 7%. The three-month interbank rate was at 3.02125% on Tuesday.

Unlike Saudi Arabia, UAE interbank rates have barely reacted to a slew of government and central bank measures to enhance liquidity and improve confidence in the banking system.

The UAE had refrained from matching a Federal Reserve interest rate cut in late October in a move the central bank governor later said was aimed at bringing its official rate - now at 1.5% - more in line with its Gulf neighbors.

“No, we will not cut,” UAE Central Bank Governor Sultan Nasser al-Suweidi told reporters in the UAE capital when asked if the country would match a likely Fed rate cut on Tuesday.

The central bank and finance ministry have together launched 120 billion dirhams ($33 billion) worth of emergency funding since September to help the banking system cope with tight credit markets.

The central bank, meanwhile, had been keeping its overnight repurchase rate on par with the Fed funds rate until early October.

Still, the three-month Emirates Interbank Offered Rate has held above 4.4% - more than double its level in June. (Reuters)