Annual inflation in Saudi Arabia accelerated to 8.67 per cent in February, the highest in at least 27 years, as rents and food costs surged in the world's largest oil exporter.
The Saudi central bank is constrained in the fight against inflation by the riyal's peg to the dollar. Saudi Arabia cut interest rates by three-quarters of a percentage point last week in tandem with the US Federal Reserve.
Inflation in February was driven by rents, which surged 18 per cent and food costs, which jumped 13 per cent, according to data from the central department of statistics.
The cost of living index rose 6.99 per cent in the 12 months to January 31, the fastest pace since 1981, according to SABB bank, HSBC's Saudi affiliate.
Unable to use monetary policy, the government is resorting to subsidies and wage hikes to cushion the impact of surging inflation, leading markets to bet that it will eventually allow the riyal to appreciate against the dollar.
"If you have global price rises and the currency is weaker by the day then there is a strong case for currency reform," said Marios Maratheftis, regional head of research at Standard Chartered Bank in Dubai.
Investors in forward contracts were expecting the riyal to gain 2.08 per cent in a year to SR3.672 per dollar. (Reuters)
Saudi February inflation surges to 8.7%