The Saudi Central Bank raised its repurchase agreement rate by 25 basis points to 4.50% on 16 September. It also raised the reverse repurchase agreement rate by 25 basis points to 4.00%. SAMA said the decision was consistent with its mandate to preserve monetary stability.
The move followed a 25-basis-point increase by the US Federal Reserve. Reuters reported that the United Arab Emirates, Qatar and Oman also increased key rates by 25 basis points after the US decision. The agency presented the changes as a regional response to the Federal Reserve’s move.
POLICY RATES FOLLOWED THE FEDERAL RESERVE
Repo operations provide short-term liquidity to banks against eligible collateral. By raising its repo rate, SAMA increased the policy cost attached to those transactions. The reverse-repo change also lifted the rate applied when eligible counterparties place excess liquidity with the central bank.
Saudi Arabia matched the scale of the Federal Reserve’s increase, although absolute policy settings differed across Gulf markets. Reuters reported that the UAE’s overnight deposit facility rate rose to 3.90%, while Oman’s repo rate reached 4.50%. Qatar also raised key policy rates by 25 basis points.
BANK FUNDING AND PRICING IMPLICATIONS
The higher policy rates can feed through to interbank pricing, bank funding costs and lending and deposit rates. The degree and timing of that pass-through will depend on domestic liquidity, banks’ balance-sheet structures and competition for deposits.
The immediate milestone will be the response of Saudi money-market rates and bank pricing after the 16 September decision. Any subsequent policy change would require a further SAMA announcement. The central bank’s release did not provide a timetable for another adjustment.