SAMA raises policy rates

Late last week, Saudi Arabian Monetary Authority (SAMA) raised its policy rates by 25bps with immediate effect, bringing the repo rate to 2.25% and the reverse repo rate to 1.75%. Deviating from the usual practice of following rate moves of the US Federal Reserve, SAMA stated that the policy rate adjustments are required for monetary stability in the evolving domestic and international monetary conditions. While the reverse repo rate was being raised in step with U.S. rate changes over the past two years, this is the first time, since 2009, that the SAMA has changed the repo rate.

Earlier this month, SAMA had also decided to suspend term repo facility for maturities of 7, 28 and 90 days, citing the decision to be reflective of recent market developments in the context of maintaining monetary stability. These extended REPO facilities were introduced in 2016 during a period of tight liquidity in the banking system caused by low oil prices. Since then, liquidity has increased significantly as oil prices increased and the government turned to international bond sales.

Narrowing SAIBOR - LIBOR Spreads

The current rate hike move by the SAMA is probably motivated by concerns over the risk of capital flight as the Saudi 3-month interbank rate fall below the USD LIBOR. After touching a high of positive 156bps in mid-2016, the 3m SAIBOR spread over LIBOR turned negative -18bps last week.

The two main factors contributing to this are: a) abundant liquidity in the local Saudi banking system driven by high deposit growth due to oil prices averaging above $60/b and anaemic loan growth in the face of economic contraction last year, and b) an unprecedented increase in LIBOR rates driven partly by high issuance of short term securities by the US government. 

KSA policy rates vs Fed Target Rate

Source: Bloomberg, Emirates NBD Research

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