Saudi central bank cuts lending rate for third time in less than two months

Riyadh: Saudi Arabia's central bank slashed its benchmark lending rate by 100 basis points on Sunday, the second reduction in a month to keep credit markets moving and boost domestic liquidity after inflation receded.

The Saudi Arabian Monetary Agency (Sama) reduced the repo rate to three per cent from four per cent and cut the cash reserve requirement local banks have to make on demand deposits to 7 per cent from 10 per cent, a Sama spokesperson said citing a circular from the central bank.

The unprecedented rate move marks the third cut in less than two months by the central bank.

"These measures are taken against the backdrop of receding inflationary pressures and ensuring that adequate system liquidity is available to meet steady domestic demand," the circular said. Two bankers estimated the reserve change will release about $2.4 billion to commercial banks - funds held in the central bank as cash reserves.

Sama's action on two fronts could signal that it has detected "serious slowdown signs especially in the private sector", said Mohammad Younus Malick, senior economist at the state-controlled National Commercial Bank.

"Sama is trying to stimulate the economy. There could be a slowdown coming from the credit area," he said.

The fortunes of the private sector in the world's largest oil exporter depend heavily on government spending, which in turn is subject to the price of crude oil.

A vertical fall in oil prices over the last four months coupled with production cuts by oil exporters have raised concern over growth prospects of the Saudi economy.

Despite being flush with oil revenues, economies in the Middle East are starting to feel the impact of the global financial crisis, which is freezing up credit markets, roiling stock markets and undermining economic growth.

"Sama needed to do this to add liquidity so that there is additional credit that flows to the private sector," said John Sfakian-akis, chief economist at SABB bank, HSBC's Saudi subsidiary.

"The availability of credit has reached limitations in terms of asset to deposit ratios of local banks while demand is growing."

The moves can also enable banks to lend more money to investors in the ailing stock market.

The three-month Saudi Interbank Offered Rate fell to 3.495 per cent after the Sama announcement from 3.51143 per cent on Saturday.