Saudi Arabia, U.A.E., Cut Rates as Growth Slows, Oil Falls

By Arif Sharif

Jan. 19 (Bloomberg) -- Saudi Arabia and the United Arab Emirates, the two biggest Arab economies, cut their benchmark interest rates by half a percentage point after oil prices tumbled and economic growth was forecast to slow.

The Saudi Arabian Monetary Agency reduced its key repurchase rate to 2 percent and its reverse repurchase rate to 0.75 percent from 1.5 percent, the state-run Saudi Press Agency reported today. The U.A.E. central bank said in an e-mailed statement that it lowered its repurchase rate to 1 percent.

Central banks across the Persian Gulf have been cutting rates, guaranteeing deposits and lending to banks to help avert a liquidity crisis as foreign investors pulled money out of the region due to the global credit crunch and crude oil prices tumbled almost 75 percent from their July high. The Saudi rate cut is the fifth since Oct. 12

“The latest cut is a sign that SAMA will continue to ensure liquidity is available and focus on growth boosting measures at a time of falling oil prices,” Monica Malik, an economist at EFG-Hermes Holding SAE, Egypt’s biggest publicly traded investment bank, said in an e-mailed note. The U.A.E.’s economy is “far more externally exposed” than other Gulf Arab states to the global economic slowdown, she said.

The U.A.E. last cut its repo rate on Oct. 8, by half a percentage points, matching moves by the U.S. Federal Reserve.

Independent Move

Today’s Saudi cut “is not unusual or a surprise as SAMA has moved independently in the past, choosing to focus on domestic developments,” Malik said.

The Saudi cuts are “aggressive” and will help reduce borrowing costs substantially, John Sfakianakis, chief economist at Saudi British Bank, said in a phone interview from Riyadh today. Interbank interest rates should begin to come down later today, he added.

Economic growth in Saudi Arabia, the world’s biggest oil exporter, will probably slow to 1.6 percent this year from 4.8 percent in 2008, according to the median estimate of eight economists surveyed by Bloomberg News. Inflation will likely ease to 7.5 percent from 9.9 percent in 2008. U.A.E. economic growth will slow to 2.4 percent in 2009 from 6.8 percent in 2008, according to a Bloomberg survey of six economists.

The rate cuts “should help to ensure that credit is available to genuine corporate demand at lower rates,” SPA said, citing SAMA.

Saudi Arabian inflation eased to 9 percent in December from 9.5 percent in November as increases in rents and food prices slowed, SPA reported today.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net