Saudi Arabia's reaction function.
A peg that imports the Fed and a lever made of oil.

The foundational fact of Saudi monetary policy is that there is, in effect, no independent Saudi monetary policy. The riyal has been pegged to the dollar at 3.75 since 1986, and that peg is the anchor of the entire economic model - it provides price stability, underpins the oil-for-dollars system, and signals an unbreakable commitment to financial orthodoxy. The cost is the loss of an independent interest-rate tool: SAMA must broadly track the Federal Reserve to defend the peg, importing the Fed's stance regardless of Saudi domestic conditions. With the Fed on hold at 3.50 to 3.75 percent, so, in effect, is SAMA. The peg is not up for debate; defending it is the first priority of Saudi policy.

Because monetary policy is imported, the kingdom's genuine reaction function operates through three fiscal and oil-based levers. The budget is the first: the government adjusts the pace of spending and the size of its deliberate deficit in response to the oil price and the transformation's needs. The PIF is the second: the sovereign fund's deployment - how aggressively it funds the giga-projects, deploys domestically versus abroad, and draws on its assets - is a powerful and discretionary economic lever. And OPEC+ output policy is the third: Saudi Arabia's decisions on production, taken with its partners, shape the oil price that funds everything. To forecast Saudi policy, model the budget, the PIF and the barrel - not the central bank.

The peg's cost becomes acute when the Fed's stance is wrong for Saudi conditions. A hawkish Fed - exactly the 2026 configuration - forces relatively tight monetary conditions on Saudi Arabia even as it runs an expansionary fiscal policy to fund the transformation. That fiscal-monetary mismatch is manageable while reserves and PIF assets are ample, but it raises the domestic cost of capital at an inconvenient time. The peg has survived every prior test through the kingdom's willingness to deploy its vast reserves in its defence, and the market attaches near-zero probability to a break. But the imported hawkishness is a genuine, if second-order, headwind in 2026.

Our base case is continuity: the peg holds without question, SAMA tracks a Fed on hold, and the real policy action runs through an expansionary budget, aggressive PIF deployment and managed OPEC+ output. The bull case is a Fed that eventually eases, relaxing the imported monetary constraint just as Saudi fiscal policy stays loose - a supportive combination for non-oil growth and Saudi assets. The bear case is a Fed forced to hike into a low-oil environment, tightening imported monetary conditions exactly when the fiscal accounts are most stressed by weak oil revenue - the configuration that squeezes the kingdom hardest, though never to the point of threatening the peg.