Country Report Saudi Arabia May 2011

Outlook for 2011-15: Monetary policy

The Saudi riyal's peg to the US dollar, which is likely to be maintained throughout the forecast period, means that the main policy rate of the Saudi Arabian Monetary Agency (SAMA, the central bank) must roughly track movements in US interest rates, although this can lead to economic distortions when the two countries' growth paths are misaligned. The Federal Reserve (the US central bank) is expected to maintain rates at a low level during 2011 and is likely to begin monetary tightening only in the second half of 2012, with the main US policy rate forecast to average 5.1% in 2015. SAMA will follow these broad trends but may begin to tighten monetary policy ahead of the US, owing to concerns about rising inflation and money supply growth. A small premium is likely to be maintained, given Saudi concerns about inflation.

Credit to the private sector stagnated for much of 2009, with banks concerned about corporate risk and as companies adjusted to new lending requirements. However, it picked up in 2010 and is likely to continue to expand. The bulk of current lending is going to larger companies, however; in an effort to address this (and to promote entrepreneurship), the government will extend financing guarantees to banks offering loans to small and medium-sized enterprises.

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