The Saudi central bank on Wednesday announced that it has increased its key interest rates by 25 basis points, following the U.S. Federal Reserve’s decision to raise its benchmark rate for the first time in nearly three years.
The Saudi central bank, also known as SAMA, said in a statement that it raised its repo rate, the rate at which it lends to commercial banks, to 5.75% from 5.5%, and its reverse repo rate, the rate at which it borrows from banks, to 5.25% from 5%.
The move came after the Fed lifted its federal funds rate by a quarter of a percentage point to a range of 1.75% to 2%, citing strong economic growth and rising inflation pressures in the U.S.
Saudi Arabia, whose currency is pegged to the U.S. dollar, usually adjusts its interest rates in line with the Fed to maintain the stability of the riyal exchange rate.
SAMA said that the rate hike was aimed at “preserving monetary stability” and “enhancing the attractiveness of saving in local currency”.
The Saudi economy, which is heavily dependent on oil exports, has been recovering from the impact of the coronavirus pandemic and lower oil prices. The International Monetary Fund (IMF) expects the Saudi economy to grow by 4.8% this year, after contracting by 4.1% last year.
However, inflation has also picked up in the kingdom, driven by higher food and fuel prices and the tripling of the value-added tax (VAT) last year. The annual inflation rate rose to 6.2% in March, the highest level since December 2010.
Some analysts expect SAMA to continue raising interest rates in tandem with the Fed, which signaled that it may hike rates two more times this year and three times next year.
“The Saudi central bank will likely follow suit with further rate hikes as long as the Fed continues to tighten monetary policy and inflation remains elevated in Saudi Arabia,” said Nasser Saidi, a former central bank governor and chief economist at Nasser Saidi & Associates.
However, other analysts warn that higher interest rates could dampen domestic demand and hurt economic recovery.
“Higher interest rates will increase borrowing costs for businesses and consumers and reduce their spending power. This could weigh on economic activity and slow down the pace of recovery,” said Fahad Al-Turki, chief economist at Jadwa Investment.
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