Excess liquidity boosts Saudi inflation

Bank liquidity in Saudi Arabia continued to grow through 2011 mainly due to a surge in deposits and this has contributed to stoking inflation again in the world’s dominant oil supplier, the country’s largest bank said on Monday.

The Gulf kingdom’s monetary system has become overfilled with liquidity as the monetary base expands for the eighth consecutive month by around11 per cent during September, National Commercial Bank (NCB) said.

In a study sent to ‘Emirates24|7’,  NCB said the relatively moderate growth cooled as bank reserves contracted for the first time in seven months by 0.3 per cent. But the report showed that currency outside banks grew at an astounding 26.5 per cent last month Y/Y to keep the monetary base’s expanding momentum.

Additionally, money supply (M1), which is mainly demand deposits, soared by nearly 22.9 per cent Y/Y, the report said.

Time and saving deposits have been contracting since October 2009 albeit at a slower rate which recorded a decline of 2.9 per cent, softening the growth of the more comprehensive money supply indicator, M3, to 11.9 per cent Y/Y.

“Banks in Saudi Arabia carry on struggling with maturity mismatches as the majority of deposits are short-term which create a barrier to finance local long term projects. Banks’ claims on the government increased by 18.3 per cent last month due to the 52.8 per cent rise in T-bill instruments,” NCB said.

Likewise, claims on the private sector are slowly climbing their way back to pre-crisis growth levels which is currently at nine per cent Y/Y.

“Excess liquidity in the Saudi system brought the inflation rate back above five per cent as the rent category remains to be the main contributor, climbing by 7.9 per cent to raise the annual CPI to 5.3 per cent during last month.”

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