Why is SAMA shadowing the Fed’s interest rate cuts? 
The US Federal Open Market Committee has lowered its policy rate and cut interest rates by 50 basis points (0.5 percentage point) to an average of between 4.75 percent and 5 percent after 11 consecutive raises since March 2020.
This reflects growing confidence in the Federal Reserve’s appropriate accommodative policy stance, the strength of the labor market, and its ability to maintain it in a context of moderate growth and inflation moving sustainably toward 2 percent.
The committee’s decision was based on recent indicators suggesting that economic activity in the US has continued to expand at a solid pace, with GDP rising at an annual rate of 2.2 percent in the first half of this year, and available data pointing to a roughly similar pace of growth this quarter.
Additionally, what has encouraged the committee to reduce the rate is that the growth of consumer spending has remained resilient, and investment in equipment and intangibles has picked up from its anemic pace last year.
Global financial markets, especially major stock markets, have reacted positively to the Fed’s interest rate cut.
With an open capital account, it is important that SAMA’s policy rates continue to move in line with the Fed’s policy rate, with the risk premium ensuring an interest rate differential consistent with the peg.
According to CNN Business, stocks jumped on Sept. 19.
The Dow Jones Industrial Average closed 522 points, or 1.3 percent higher, reaching a new record after surpassing the 42,000 level for the first time.
The S&P 500 rose 1.7 percent, topping 5,700 for the first time and closing at a fresh high, while the Nasdaq Composite added 2.5 percent..
It is believed the cut of 50 basis points will pave the way in the US for lower interest rates on everything from new car loans to new mortgages, credit card bills and other consumer products and services.
Following the Fed’s decision, the Saudi Central Bank decided to reduce the rate of both the Repurchase Agreement and Reverse Repurchase Agreement by 50 basis points each, to 5.50 percent and 5 percent, respectively.
SAMA’s objective in doing this is in line with its objective of preserving monetary stability and avoiding any unnecessary currency speculation.
The IMF’s Concluding Statement of the 2024 Article IV Mission on Saudi Arabia stated that the currency peg to the US dollar remains appropriate since the exchange rate regime has provided a credible anchor for monetary policy and is backed by ample external buffers.
With an open capital account, it is important that SAMA’s policy rates continue to move in line with the Fed’s policy rate, with the risk premium ensuring an interest rate differential consistent with the peg.
• Talat Zaki Hafiz is an economist and financial analyst. X: @TalatHafiz
