Saudi Arabia cut some borrowing costs today to relieve pressure on the riyal which has been weakened by the slide in the US dollar.
The Saudi Arabian Monetary Agency (SAMA), the central bank of the world's largest oil exporter, reduced the reverse repurchase rate by 50 basis points to 4.25 per cent.
Investors have piled into the riyal in the last week since a Saudi source was reported saying Reuters could consider revaluing its currency for the first time since 1986, when it pegged the riyal to the dollar at 3.75.
The riyal hit a 21-year high on Thursday of 3.70 and investors are reckoning on an appreciation of as much as 3.2 per cent in a year.
The reverse repo rate is used by banks to set deposit rates, so cutting the rate make bets on exchange-rate appreciation less attractive, bankers said.
The central bank kept its benchmark repurchase rate, which banks use to determine lending rates, unchanged at 5.5 per cent.
"They are doing this to calm down the market and prevent speculation on the local currency," said John Sfakianakis, chief economist at SABB, HSBC's Saudi affiliate.
Saudi Arabia's move follows similar rate cuts in the UAE on Thursday
The cuts reflect concern about Arab countries tying their currencies to the US dollar. There has been speculation that the UAE and the Saudis may be joined by Qatar, Bahrain and Oman in unpegging their currencies to prevent an inflation-stoking appreciation in their currencies.
Kuwait broke ranks with its neighbours in May by dropping its peg to the dollar in favour of a basket of currencies, because of the inflationary effect of the dollar's slide.