Saudi Central Bank Cuts Interest Rates in Strategic Move
Saudi Arabia’s central bank has made a bold move by implementing its second interest rate reduction of 2024, slashing the benchmark by 25 basis points to 5.25 percent.
This decision closely follows the footsteps of the US Federal Reserve, which recently cut rates by the same amount to a target of 4.5 – 4.75 percent.
Describing the rationale behind the move, the central bank – also known as SAMA – stated: “In light of global developments, and in accordance with the Central Bank’s objective of maintaining monetary stability, it has decided to reduce the Repurchase Agreement rate by 25 basis points to 5.25 percent, and the Reverse Repurchase Agreement rate by 25 basis points to 4.75 percent.”
Unlike the previous 50 basis points cut in September, this latest adjustment is a calculated strategic shift in monetary policy, aimed at easing high borrowing costs that have been in place to combat inflation over the past two years.
Gulf Cooperation Council central banks, which are tied to the US Federal Reserve due to currency pegs to the dollar, have also followed suit. The UAE and Bahrain reduced rates by 25 basis points, while Qatar opted for a slightly larger 30-point cut.
Kuwait, on the other hand, took a different approach. The central bank, which pegs its currency to a basket rather than exclusively to the dollar, cut rates by 25 basis points in September to 4 percent but has not announced further cuts as of November.
Over the past two years, the US Federal Reserve has aggressively tightened its monetary policy to combat inflation, resulting in increased interest rates. While progress has been made towards the Fed’s 2 percent target, inflation remains slightly elevated, and consumers continue to face high costs.
The labor market has shown signs of cooling, with unemployment rates rising slightly but still at low levels. The Fed faces the ongoing challenge of balancing inflation control with maintaining a healthy job market.
The decision to lower interest rates could have significant implications for the GCC, especially for Saudi Arabia’s economy.
The Kingdom’s non-oil sectors, a key focus under Vision 2030, are poised to benefit greatly from the influx of cheaper credit.
Sectors such as construction, real estate, and services, which have experienced significant growth, are expected to see further acceleration.
Lower borrowing costs could stimulate investments in infrastructure and technology, crucial for diversifying away from oil.
Corporate lending is also expected to increase, with businesses in capital-intensive industries like real estate likely to take advantage of more affordable financing.
This could lead to more ambitious expansion plans, particularly for projects aligned with Vision 2030 goals, such as NEOM and the Red Sea Project.
The real estate market could experience a surge as cheaper credit drives demand for housing.
Riyadh’s growing population and influx of expatriates are expected to fuel this trend, with lower interest rates making mortgages more accessible.