Saudi Arabia has resumed its process of raising the repurchase agreement rate, “repo”, by 25 basis points to 6%, and increasing the reverse repurchase agreement rate by 25 basis points to 5.50%.
The move is part of the Kingdom’s efforts to reduce inflation, which currently stands at a relatively low and non-alarming level of 2.7%.
The decision by the Saudi Central Bank (SAMA) follows the approval by the US Federal Reserve on Wednesday to raise interest rates by 25 basis points, aligning with its objectives to maintain monetary stability.
SAMA had kept interest rates unchanged in June, in line with the US central bank's decision to pause its perceived opportunistic increase, allowing investors to take a breather and inject more investments into the local market.
Speaking to Asharq Al-Awsat, experts said the decision aids in transforming investments from quantitative to qualitative, as cautious funds migrate towards central banks.
They believe it contributes to monetary stability amidst the ongoing surge in global inflation, which consequently affects Saudi Arabia. The Kingdom has taken all necessary measures to curb the rise in inflation.
Saudi Shura Council member Fadel al-Buainain told Asharq Al-Awsat that interest rates are among the most crucial tools for controlling inflation or stimulating the economy, depending on economic variables and demands.
He emphasized that controlling interest rates will not achieve the desired goals unless there is harmony between fiscal and monetary policies, and a synchronization of their tools to achieve strategic objectives.
In al-Buainain’s view, what the US economy needs may not be the same for economies tied to the dollar, including Saudi Arabia and the Gulf countries. Nevertheless, they find themselves obliged to mirror the Federal Reserve’s actions to maintain monetary stability.
He explained that Gulf countries are not experiencing high inflation rates; in fact, they have some of the lowest. He stressed that inflation in Saudi Arabia remains at a relatively low and non-alarming level, while the economy requires stimulation to sustain growth.
Al-Buainain said that raising interest rates leads to a slowdown in economic growth and may negatively impact certain sectors and projects due to increased financing costs, especially in the real estate sector, which heavily relies on borrowing.
