Credit recovery may boost inflation

A gradual recovery in dormant bank lending in Saudi Arabia could ally with high rents and food prices to boost inflation in the largest Arab economy this year, a key Saudi bank said on Tuesday.

Last year’s fourth quarter cost of living index (CLI) in the world’s oil superpower dropped from a high of six per cent in the third quarter to around 5.7 per cent, primarily due to a decline in rent and utility price growth, National Commercial Bank (NCB) said in a study.

But it noted that the underlying fundamental drivers for upward pressure on prices have not changed, as food prices climb to about 8.1 per cent from 7.5 per cent in the third quarter due to the continued rise in global food prices.

On a monthly basis, the Central Department of Statistics and Information reported that January overall CLI increased to 5.3 per cent year-on-year compared to last year, with growth in food prices decelerating to 6.8 per cent, housing to 8.3 per cent, and other expenses staying at 8.1 per cent.

Although inflation has been following a downward trend since a high of six per cent in July 2010, if recent global commodity trends and increased domestic demand continue, this will make it highly unlikely that inflation will break the five per cent level, NCB said.

“However, in terms of rising rent and utility prices, if further measures, such as the introduction of the mortgage law, are not taken to curb its effects, overall inflation in the Kingdom will most likely remain above five per cent,” it said.

“In addition, money supply expanded to a modest five per cent Y/Y in December as opposed to a high of 10.7 per cent at the end of 2009.

This, coupled with the rise in bank credit to 5.2 per cent in December, indicates the revival of bank lending in 2011, which will drive inflation higher, as money creation accelerates.”

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