Saudi inflation predicted to soar

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CURRENCY DEPRECIATION: Saudi Arabia's central bank governor said he predicts inflation could hit 10% in the kingdom this year. (Getty Images)

Inflation in Saudi Arabia could cross 10% this year, which would be the highest level since at least the 1970s when Gulf economies boomed on soaring oil prices, the kingdom's central bank governor said.

Still, consumer price rises in the world's largest oil exporter whose currency is pegged to the US dollar could then ease in the second half as government inflation measures take hold and as global commodities demand cool, Hamad Saud Al-Sayyari said.

Inflation in the largest Arab economy hit at least a 27-year high of 8.7% in February, almost double the level of six months earlier, as rents surged 18% and food prices jumped 13%.

"If inflation continues to grow at the same pace of the previous months, then it will rise to and can exceed 10%," Al-Sayyari told reporters in the Saudi capital late on Tuesday.

"But as a result of both expectations of a decline in global demand for commodities because of the US economic slowdown and the effectiveness of the government measures, it might decrease in the second half, but these remain forecasts," he said.

Like most states in the world's biggest oil-exporting region, Saudi Arabia is restrained in its inflation fight by a currency peg to the ailing US dollar, which forces it to track US interest rate cuts and makes imports more expensive.

The Saudis have repeatedly ruled out any change to the riyal, which has been fixed at 3.75 to the dollar since 1986.

Instead, the government has introduced cost of living allowances and welfare payments, tightened bank lending curbs, boosted subsidies and slashed import levies to offset the impact of price rises on its 25 million people.

Al-Sayyari pulled back from remarks in February, when he said inflation "will decline" in the second half of the year. Uncertainty about global commodity prices, particularly food items, have made forecasting inflation more difficult.

Rice prices, for instance, are surging as governments and importers rush to stock up the grain on growing fears the food staple will be in short supply. India banned non-basmati rice exports last month to try to ease pressure on prices.

"The global inflation in prices of some commodities has been growing and poses risks," Al-Sayyari said.

"Decisions by some governments to ban exports may add inflationary pressures."

With oil prices at record highs well above $100 a barrel, Gulf Arab economies are booming, driving demand for everything from housing to power and water.

Saudi Arabia, the UAE, Qatar and Bahrain have pledged to maintain the currency pegs to the dollar until the bloc achieves monetary union as early as 2010.

Kuwait broke ranks with its neighbours last year by abandoned its dollar peg, arguing that dollar weakness was fuelling inflation by making some imports more expensive. (Reuters)

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