The Saudi Arabian Monetary Agency (SAMA), the central bank, reduced the reverse repurchase rate by 50 basis points to 4.25 per cent, three bankers in Saudi Arabia and the UAE said.
Investors have piled into the riyal in the last week since a source familiar with Saudi policy said the country could consider revaluing its currency for the first time since 1986, when it pegged the riyal to the dollar at 3.75.
The reverse repo rate is used by banks to set deposit rates, so cutting the rate would make bets on exchange-rate appreciation less attractive, bankers said.
The central bank kept its benchmark repurchase rate, which banks use to determine lending rates, unchanged at 5.5pc.
"They are doing this to calm down the market and prevent speculation on the local currency," said HSBC Saudi affiliate SABB's chief economist John Sfakianakis. "Investors will find it less attractive to hold deposits in riyal," he said.
The Saudi riyal hit a 21-year high on Thursday of 3.70 and investors are betting on an appreciation of as much as 3.2pc appreciation in the riyal in a year, according to forward rates yesterday.
Saudi Arabia's move follows similar rate cuts in the UAE on Thursday, when the central bank cut its six- to 18-month certificate of deposit rates by as much as 20 basis points to make holding dirhams less attractive.
UAE Central Bank governor Sultan Nasser al-Suweidi said on November 15 that he was under mounting social and economic pressure to drop the dirham's peg to contain inflation, which hit a 19-year high of 9.3pc last year.
Forward rates yesterday showed investors betting on a 2.9pc appreciation in the UAE dirham, down from more than 3pc before the Thursday rate cut.
"The Saudi and UAE moves are not surprising given the amount of pressure on the currencies," said Jason Goff, head of group treasury and market sales at Emirates Bank Internationa.
Saudi Arabia has reduced its reverse repo rate two times this month but has declined to lower lending costs following two US Federal Reserve rate cuts in September and last month. Saudi inflation hit a decade high of 4.89pc in September. Rate cuts in the Saudi Arabia and the UAE may not have a dampening affect on speculation that the two states, as well as Qatar, Bahrain and Oman, will be forced to either give up their dollar pegs or allow currencies to appreciate, analysts said.
Via: Gulf Daily News
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