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Sat 23 Feb 2008 03:50 PM

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Businesses fear impact of inflation

Nearly half of firms surveyed in Saudi Arabia last month expect inflation to have negative impact on business.

Nearly half of firms surveyed in Saudi Arabia last month expected inflation to have a negative impact on their business and a third said they would pass on higher costs, SABB bank said.

In the survey, which showed high business confidence, more than a third of respondents said they expected Saudi Arabia, facing record inflation in December, to revalue its US dollar-pegged riyal by the end of September, the bank said.

Saudi Arabia's dollar peg limits its ability to fight inflation, which hit 7% in January, as it must mirror US interest rate moves at a time when the US is cutting rates to ward off recession.

The US economy is slowing but Saudi Arabia's is growing due to a five-fold increase in oil prices over the past six years.

Some 48% of 609 respondents said they expected inflation to harm their businesses and 33% said they would pass on higher costs to end-users through higher prices.

"In theory, when firms [and their employees] anticipate such an impact, they will seek higher prices [and wages]," SABB said.

"Business confidence is expected to remain very strong... 87% of respondents expected improved performance of their businesses in Q2 and Q3," said the survey sent to newswire Reuters.

Some 37% of respondents anticipate a revaluation of the riyal before the end of the third quarter, the bank said.

The world's largest oil exporter will act prudently to control inflation and should avoid "easy solutions", central bank governor Hamad Al-Sayyari said this week, referring to calls to drop its currency peg to the dollar.

Saudi Arabia has tried to offset the impact of price rises through measures including welfare payments, subsidies and tighter bank lending restrictions.

On average, food costs in the desert kingdom of 25 million people rose 7% last year, while housing and related costs, including rents, climbed 8.1%, according to government data. (Reuters)

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