The Interest Rate in the Kingdom of Saudi Arabia is a monetary tool employed by the Saudi Central Bank (SAMA), similar to other central banks globally. Its purpose is to regulate the flow of liquidity within the macroeconomy, whether during periods of recession, slowdown, growth, or recovery.
The entity responsible for the interest rate in Saudi Arabia
SAMA uses the interest rate to determine the cost of borrowing between banks for overnight or longer periods. It also sets the cost for banks and financial institutions to offer financing products like personal and mortgage loans.
Global interest rate indicators
Interest indicators or rates are many and play a role in regulating lending and financing operations by setting the return that central banks determine for interest rates applied to loans between banks, or set by commercial banks to determine the interest rates among themselves. Among these are the SAIBOR, used between banks in the Kingdom; LIBOR, used in England; and EURIBOR, used across Europe.
Considerations for borrowing interest rates in Saudi Arabia
Interest rate movements, whether up or down, depend on the fixed exchange rate system and the relatively open capital account, given SAMA’s adherence to a fixed exchange rate policy that pegs the SAR to the USD at a rate of SAR3.75 per USD1 since 1986.
This pegging system enables SAMA to maintain control over liquidity and prevent undue pressure on both the SAR and the USD in monetary movements. For example, in 2018, the Saudi Arabian Monetary Authority (now Saudi Central Bank) increased the reverse repo rate by one hundred basis points through staggered increases of twenty-five basis points each, reaching a rate of 2.5 percent, in line with the US Federal Reserve’s interest rate hikes.
Mechanism for increasing interest rates in Saudi Arabia
The mechanism for increasing interest rates by SAMA is based on increased inflation rate in the economy (increase in prices of goods and services) as a means to curb such inflation. Increasing interest rates reduces borrowing, which decreases spending and consumption demand, and results in inflation decrease. Lowering the interest rate occurs to treat the state of economic recession, as it makes the price of money cheap, which increases borrowing and consumer spending to get the economy out of recession.
The calculation of interest rate indicators involves a precise mathematical process that determines the required rate increase or decrease, by collecting bids from banks operating in the market, eliminating the highest and lowest two banks, and calculating the average rate for the remaining banks.
SAMA's decisions to control liquidity
The decisions taken by SAMA regarding interest rates reflect its efforts to control liquidity and maintain monetary stability in light of global developments. For example, during the global economic impacts caused by the COVID-19 pandemic, SAMA issued a decision in March 2020 to lower the repo rate (interest rate) by seventy-five basis points, from 1.75 percent to 1.00 percent, and the reverse repo rate by seventy-five basis points, from 1.25 percent to 0.50 percent.
Decisions by SAMA regarding reverse repo and repo:
- June 2017: Increasing the repo rate from one hundred basis points to 125 basis points while keeping the repo rate at two hundred basis points.
- March 2018: Increasing the repo rate from two hundred basis points to 225 basis points, and increasing the reverse repo rate from 150 basis points to 175 basis points.
- July 2019: Decreasing repo rate from three hundred basis points to 275 basis points while decreasing the reverse repo rate from 250 basis points to 225 basis points.
- October 2019: Decreasing the repo rate by twenty-five basis points from 2.50 percent to 2.25 percent, and decreasing the reverse repo rate by twenty-five basis points from 2.00 percent to 1.75 percent.
- March 2020: Decreasing the repo rate by fifty basis points from 2.25 percent to 1.75 percent, and decreasing the reverse repo rate by fifty basis points from 1.75 percent to 1.25 percent.
- March 2020: Decreasing the repo rate by seventy-five basis points from 1.75 percent to 1.00 percent, and decreasing the reverse repo rate by seventy-five basis points from 1.25 percent to 0.50 percent.
- March 2022: Increasing the repo rate by 0.25 percent from 1.00 to 1.25 percent, and increasing the reverse repo rate by 0.25 percent from 0.5 to 0.75 percent.
- June 2022: Increasing the repo rate by 0.5 percent from 1.75 to 2.25 percent, and increasing the reverse repo rate by 0.5 percent from 1.25 to 1.75 percent.
- July 2022: Increasing the repo rate by seventy-five basis points from 2.25 percent to 3.00 percent, and increasing the reverse repo rate by seventy-five basis points from 1.75 percent to 2.50 percent.
- September 2022: Increasing the repo rate by seventy-five basis points to 3.75 percent, and increasing the reverse repo rate by seventy-five basis points to 3.25 percent.
- November 2022: Increasing the repo rate by seventy-five basis points to 4.50 percent, and increasing the reverse repo rate by seventy-five basis points to 4.00 percent.
- December 2022: Increasing the repo rate by fifty basis points to 5.00 percent, and increasing the reverse repo rate by fifty basis points to 4.50 percent.
- February 2023: Increasing the repo rate by twenty-five basis points to 5.25 percent, and increasing the reverse repo rate by twenty-five basis points to 4.75 percent.
- March 2023: Increasing the repo rate by twenty-five basis points to 5.50 percent, and increasing the reverse repo rate by twenty-five basis points to 5.00 percent.
- May 2023: Increasing the repo rate by twenty-five basis points to 5.75 percent, and increasing the reverse repo rate by twenty-five basis points to 5.25 percent.
- July 2023: Increasing the repo rate by twenty-five basis points to 6.00 percent, and increasing the reverse repo rate by twenty-five basis points to 5.50 percent.
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