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20 May 2024

Saudi Arabia worried about inflation, peg to stay

By Reuters

Saudi c.bank governor says global food inflation a worry; economic growth in 2011 seen at up to 4.5 pct; OPEC member's c.banker reiterates commitment to dollar peg

Saudi Arabia is worried that a global rise in food prices may drive up inflation but remains committed to its dollar currency peg, the OPEC member's central bank governor said on Monday.

Inflation in the world's top oil exporter -- the largest Arab economy -- climbed to an 18-month high of 6.1 percent last August, fuelled by swelling food and housing costs. It has since eased, but analysts expect more price pressures to come.

"One of the things that worry us is inflation," Central Bank Governor Muhammad al-Jasser told a business conference in the Saudi capital.

Jasser's comments echo recent remarks by the kingdom's finance minister Ibrahim Alassaf, who said inflation was easing a little but that the G20 member should remain vigilant.

Saudi consumer price growth eased to 5.4 percent on an annual basis in December from November's 5.8 percent, but an expected surge in global food prices this year might add to price pressures in the import-reliant desert kingdom.

"Food price inflation in a global context is an acute concern," said John Sfakianakis, chief economist at Banque Saudi Fransi.

"Saudi Arabia is heavily dependent on food imports. The concern lies, not just on commodities that have appreciated more recently, with wheat and different cereal products, but also of course the price of rice," he said.

Saudi Arabia has emerged as a major buyer of wheat and wants to build up reserves of basic commodities such as wheat, rice, oils and sugar to shield against price rises, as its economy benefits from robust oil prices.

Analysts polled by Reuters in December expected Saudi inflation to reach 5.0 percent on average this year after 5.3 percent in 2010.


Jasser said Saudi economic growth this year should be as good as 3.8 percent in 2010, if not better. He later told a news conference that it could reach up to 4.5 percent, repeating that bank lending was poised to rise this year.

His forecast is slightly more optimistic than the 4.3 percent growth estimate in the Reuters poll.

Jasser also reiterated the kingdom's long-standing commitment to its dollar currency peg, saying it served the country well.

Periods of dollar weakness tend to question the sustainability of dollar pegs in the Gulf due to imported inflation risks. Kuwait is the only Gulf country to have dropped its peg to the US currency, switching to a currency basket in 2007 to rein in then-soaring inflation.

The dollar touched a new two-month low of $1.3648 against the euro <EUR=> on Monday. The single European currency has rallied some 6 percent in the past two weeks, helped by easing worries over euro zone debt.

Gulf central banks have to keep their interest rates close to U.S. benchmarks to avoid excessive pressure on dollar pegs due to hot money inflows, meaning they cannot use policy tools to counter the impact of rising global food prices directly.

Jasser also said there was no deadline for a long-delayed Gulf currency union, in which Saudi Arabia plans to take part with Kuwait, Qatar and Bahrain.