Saudi cuts key interest rate

The Saudi Arabian central bank cut its key interest rate by half to 0.25 per cent this morning in a move aimed at boosting lending in the kingdom. Saudi Arabia has cut its benchmark rate six times since last summer when the global financial crisis caused an acute funding shortage in the Gulf. The most recent cut brings interest rates to their lowest level in several years. "This measure has been taken to normalise domestic money market conditions against the backdrop of stable macroeconomic activity," the Saudi Arabian Monetary Agency (SAMA) said in a statement, announcing the cut in its reverse repurchase rate.

Nearly all the Gulf states have pegged their currencies to the dollar, a policy which would normally require them to follow American monetary policy or risk inviting in potentially destabilising flows of foreign funds seeking to take advantage of interest rate gaps. However, since the onset of the financial crisis, a global funding shortage has made it possible for Gulf central banks to diverge slightly from the Fed, which cut its key policy rate to near-zero in December.

The UAE most recently cut its overnight repurchase rate, the rate at which it lends to commercial banks, from 1.5 per cent to 1 per cent in January in an attempt to "support domestic activity and foster business confidence", according to the Central Bank. [e-mail]