Saudi cbank sees inflation continuing to rise in Q3

zoom

STILL RISING: Inflation will increase in the third quarter but at a slower rate, SAMA said. (Getty Images)

Saudi Arabia's central bank said on Tuesday inflation, which hit a 30-year high of 10.6 percent in June, would continue to rise in the third quarter, but at a slower pace.

However, the Saudi Arabian Monetary Agency (SAMA) also said annual growth in Saudi money supply, an indicator of future inflation, eased for a second consecutive month in July.

"Expectations indicate a continuing increase in the inflation rate in the third quarter although at a slower pace from the previous period," SAMA said in a note on its website.

The rise of inflation in the third quarter will be slower mainly because of measures the Saudi government has taken to subsidise some staples and also to rising supplies, SAMA said.

But a rising pace of government spending coupled with an expected increase in consumer spending will continue to fuel inflationary pressures in the third quarter, SAMA noted.

The third quarter will coincide with the start of both the Muslim fasting month of Ramadan and the new school year as well as some religious celebrations, all of which fuel spending.

Housing prices are also expected to at least stabilise if not increase because of a shortage of housing units in the main cities of the kingdom and limited property development resulting from a rise in both the prices of land and construction input costs, it added.

Inflation is a key challenge across the Gulf Arab region, where currencies are pegged to the ailing dollar, as their economies surge on windfall revenues from oil that has been racing to record highs.

SAMA said the annual growth of M3, the broadest measure of money circulating the Saudi economy, reached 20.85 percent in July down from 21.34 percent in June.

The drop in July's annual money supply growth follows steps taken by SAMA over the past 10 months which nearly doubled reserve requirements banks have to make to soak up liquidity.

It could also be because thousands of Saudis take money from their accounts for holidays in the summer, said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi subsidiary.

"On a month to month basis, we are still seeing that money supply is increasing although at lower pace than in the first half of 2007," Sfakianakis said.

SAMA is also showing greater vigilance in maintaining banks' assets to deposits ratio at the required 85 percent to control liquidity, which has led to an increase in borrowing costs, especially on the corporate lending side, bankers said.

The three-month Saudi Interbank Offered Rate (SIBOR) was at 4.109 percent on Tuesday against 3.6 pct a month earlier year because of tight fund availability and high demand especially for project financing.

But the decline in annual money supply growth will bring no relief to inflationary pressures in the third quarter, SAMA said in a separate note. Saudi Arabia is the world's largest oil exporter and the region's most populous nation.

The country has dismissed changing its foreign exchange regime and has instead raised public sector wages, and sought to control money supply growth while boosting subsidies for food and public services and curbing public spending.

Dollar pegs force the Gulf Arab states, bar Kuwait, to track the United States in adjusting interest rates. With the dollar tumbling this year to record lows against the euro and a basket of major currencies, some imports have become more expensive. (Reuters)

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM