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Mon 22 Nov 2010 07:58 PM

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Saudi central bank sees lower inflationary pressures in Q4

Inflation in biggest Arab economy has shot up beyond analysts' expectations this year

Saudi central bank sees lower inflationary pressures in Q4
PICK UP: Lending growth in Saudi Arabia, has been picking up since it screeched to a halt last December

Saudi Arabia's high rate of inflation may ease further in the final quarter of 2010, the central bank of the world's top oil exporting nation said on Monday.

Inflation in the biggest Arab economy has shot up beyond analysts' expectations this year, driven by soaring food and housing costs, factors outside the central bank's control.

It has eased since touching an 18 month high of 6.1 percent in August but at 5.8 percent in October still remains the highest among Gulf Arab oil producers.

In its quarterly inflation report, the central bank said: "The data shows that there is a possibility of continued domestic inflationary pressure in the fourth quarter of 2010, but it will be at a lower level than in the previous two quarters."

It said housing price pressures should decrease as additional supply enters the market.

The desert kingdom's toolbox for tackling inflation is limited by its currency peg to the US dollar, with fiscal policy being the main tool to steer the oil based economy.

Abdulhamid Alamry, a member of the Saudi Economic Association, said the riyal's peg to the weak dollar is the main reason behind inflation in the country and that the situation will only worsen when Saudi banks begin to lend more.

He said: "If Saudi lending goes back to normal the inflationary pressures will become even worse."

Lending growth in Saudi Arabia, hit by debt restructuring in family businesses, has been picking up since it screeched to a halt last December but at 3.6 percent in September 2010, the rate is far below double-digit clips seen in early 2009.

Analysts polled by Reuters expect average inflation of 5.3 percent this year and 5.1 percent in 2011, still well below a record high of 11.1 percent in July 2008.

Economists believe that inflation will climb going into next year with the weak dollar adding pressure, while budget spending will overshoot the government's target.

Saudi Arabia's economy is seen growing by 3.8 percent this year, following a mere 0.6 percent expansion in 2009, helped by higher oil prices and strong fiscal spending.(Reuters)

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