Soaring money supply fuels Saudi inflation fears

Saudi Arabia's money supply grew at 23.9% year-on-year in January, its highest in at least four years, signalling inflation in the world's largest oil exporter could climb further from a 25-year peak.

M3, the broadest measure of money circulating in the Saudi economy, grew to 815.14 billion riyals ($217.4 billion) on January 31 compared with 657.92 billion riyals a year earlier, the Saudi Arabian Monetary Agency said on its website.

Money supply growth was 19.6% in December, easing slightly from November after the central bank tightened bank lending curbs.

"The high growth in money supply is partially indicative of a booming economy but continues to add to the inflationary pressures," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate.

"In such an environment the challenge is to regulate money supply in a declining interest rate environment as well as minimise unproductive debt expansion," he said.

Inflation in the largest Arab economy, which pegs its riyal currency to the dollar, hit 7% in January - at least a quarter-century peak - as rents surged 16.7%.

The central bank's room for manoeuvre to combat inflation is limited by its need to track US interest rates given the peg.

The kingdom has raised bank reserve requirements twice since November, forcing banks to keep more money in their vaults as the US Federal Reserve slashed interest rates by 225 basis points since September.

The Saudi central bank raised the reserve ratio to 9% from 7% in November, and upped it again in January to 10%.

In January, demand deposits grew 31.6% to 326.77 billion riyals, versus growth of 27.9% in December. Time and savings deposits were up 30.6% in January versus 25.2% in December.

Money supply grew at its fastest pace since at least 2004 in January, according to central bank data.

Gulf Arab inflation, which is rising as economies surge on a five-fold rise in oil prices in the last six years, would fall significantly were the oil producers to sever their dollar pegs, former Fed chairman Alan Greenspan said last week.

Gulf currencies strengthened after Greenspan's comments, which coincided with the dollar hitting fresh record lows against the euro and a basket of major currencies.

But revaluing the riyal would not necessarily help reduce inflation because the imported element is limited and money supply growth is being driven by government spending, Mohammed Al-Jasser, vice governor of the central bank, said last week.

Inflation would probably not ease until next year, when new housing supply comes on stream, Al-Jasser told newswire Reuters.

Saudi Arabia, which has maintained the value of its riyal to the dollar for 22 years, lowered its reverse repurchase rate, which guides bank deposit rates, by two percentage points after the Fed cuts. It has kept its repurchase rate, which guides lending rates, steady at 5.5%.

The central bank is unlikely to cut its repurchase rate in response to further easing by the Fed as it seeks to stem money supply growth, Al-Jasser said. (Reuters)

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