Saudi inflation falls on food; rates seen on hold

Saudi Arabia's annual inflation eased to 4.7 per cent in March thanks to a monthly dip in food prices, data showed on Wednesday, and analysts saw the biggest Arab economy keeping interest rates steady this year.

Inflation in the world's top oil exporter has been falling since it touched 18-month highs of 6.1 per cent in August, and slowed to a 10-month low of 4.9 per cent in February.

But analysts say demand will be boosted by a package of government handouts and see inflation averaging 5.6 per cent this year, leading the kingdom's central bank to keep interest rates unchanged at 2 per cent.

That contrasts with Qatar, which cut its main overnight deposit rate by 50 basis points last week in a move analysts said would boost domestic lending and ease capital inflows.

"We don't expect a change in benchmark interest rates in 2011, unlike Qatar last week," said Monica Malik, chief economist at EFG-Hermes in Dubai. "On the one hand, credit growth is starting to recover, and the central bank and policy makers would want to see a continuation of that.

"On the downside, with inflation still above 4 per cent, the strong spending plan, and the pick-up in global inflation, we do not expect a reduction in the interest rate. This is a comfortable rate and we expect rates to remain on hold in Saudi."

Private sector credit rose by 6.3 per cent year-on-year at the end of February, compared to 1.6 per cent in the same period last year.

Central Bank Governor Muhammad Al Jasser said in January that lenders had taken enough measures against bad loans and lending would accelerate this year.

On a monthly basis, Saudi consumer prices rose by 0.3 per cent in March, slightly up from a 0.2 per cent increase in the previous month, data from the Central Department of Statistics showed.

"I would not expect inflation to continue to go down by this much because it has already declined by a substantial amount," said John Sfakianakis, chief economist at Banque Saudi Fransi.

"We should see in the coming months an increase. I am surprised inflation has fallen this amount in such a short period of time."

Public sector boost

Finance Minister Ibrahim Alassaf said last month that the country may see some temporary inflation from increased social spending.

Saudi King Abdullah offered $93 billion in handouts in March to stave off unrest rocking the Arab world.

He announced that 250 billion riyals ($66.7 billion) would be spent on 500,000 housing units and 16 billion riyals for more medical facilities. This follows a $37 billion package announced in February in an initial move to ease social tensions.

"We believe that the government will continue to increase subsidies to limit the rise of food and fuel prices in the domestic market, especially in the context of the recently announced measures and the regional political developments," Malik said.

Food prices, which have the largest 26 per cent weight in the consumer basket fell 0.1 per cent on a monthly basis in March after rising 0.1 per cent in the previous month.

Housing costs rose 0.8 per cent month-on-month in March compared to 0.6 per cent in February, and transport prices increased by 0.1 per cent on a monthly basis in March versus 0.3 per cent in the previous month, the data showed.

Business activity in Saudi Arabia's non-oil private sector eased to a three-month low in March, while input price inflation remained near February's series record pace, a purchasing survey showed.

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