Saudi money supply growth slows to 19%

Money supply growth in Saudi Arabia slowed to 19.3 per cent in April as the government moved to control the highest inflation since the oil boom of the 1970s, Central Bank data showed.

M3, the broadest measure of money circulating in the economy, increased to SAR826.21 billion ($220.3bn, Dh809.15bn) in the year to April 30, compared to SAR692.38bn a year earlier, Saudi Arabian Monetary Agency (Sama) data showed.

Growth was 23 per cent in March and 26.2 per cent in February 2008.

"This is a good sign but it has to be verified in the months to come to confirm that it is not a one-off," said John Sfakianakis, chief economist at Sabb bank, HSBC's Saudi affiliate. He noted that annual growth of money supply slid to 19.6 per cent in December from 21.6 per cent in November. April's money supply growth was the weakest since August 2007.

Inflation in the largest Arab economy, which pegs its riyal currency to the dollar, hit 10.5 per cent in April and Sama said on Monday that it will probably advance further this quarter albeit at a slower pace.

Sama's room for manoeuvre to combat inflation is limited by its need to track United States interest rates due to the peg. It has raised bank reserve requirements three times over the November 2007-April 2008 period from seven to 12 per cent, forcing banks to keep more money in their vaults as the US Federal Reserve cut interest rates by 300 basis points since September. Sama has also kept tracking Fed Reserve rate moves with cuts in its reverse repurchase rate, which guides deposit rates.

The decline in April's money supply growth was due essentially to drops in both time and savings deposits and demand deposits.

"This could be linked to interest rate cuts and higher reserve requirements," Sfakianakis said.

Measured month-on-month, April money supply fell almost one per cent for the first time in 14 months. April inflation clocked its lowest monthly rise since December 2007.

"This shows a positive correlation between money supply and inflation for the time being," Sfakianakis said.

Saudi Arabia reduced its reverse repurchase rate by 25 basis points this month to two per cent after a US interest rate cut in the same week and continued a policy of leaving its benchmark repurchase rate at 5.5 per cent.

 

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