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Tue 8 May 2007 12:30 PM

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Saudi inflation rate is 'a challenge'

Finance minister admits that price stability is a problem as rent and food prices rocket.

Saudi Arabia's finance minister said on Tuesday that keeping prices stable was "a challenge" and that the kingdom was striving to make sure that government spending would not impede economic development.

"Price stability is a challenge and we are working to make sure the size of spending does not affect economic development," Ibrahim al-Assaf told a conference in Saudi Arabia.

"We will continue in our programme of investment expenditure. The main area we will look to is current expenditure."

Rising rents and food prices, including a near 60% jump in the cost of fresh vegetables, drove Saudi Arabia's annual inflation rate to 3% in January, according to official statistics.

Saudi inflation remained at 3% in February as prices for food and beverages increased.

The kingdom's central bank governor, Hamad Saud al-Sayyari, said today that inflation is "still under control" at this rate. "The initial indication is that it is stabilising but it's too early to make any estimates," he said.

The kingdom's riyal currency is pegged to the U.S. dollar and Saudi interest rates roughly track U.S. Federal Reserve rates, giving the country few monetary policy tools with which to curb inflation.

The weakening dollar has driven up the cost of some imports throughout the oil-exporting Gulf Arab region, contributing to inflation.

The United Arab Emirates said in April it would penalise retailers and suppliers for "unjustified" price rises in a bid to control inflation, which reached 9.5% in 2006.

Saudi Arabia has ruled out any changes to its dollar peg.

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