Saudi Arabia's inflation for 2008 would average 6.5 percent amid expected new interest rate cuts and a surge in rents and food prices, Jadwa Investment said in a study. “Inflation has continued to rise. Year-on-year inflation jumped to 8.7 percent in February from seven percent in January. Rents and food prices continue to be the main sources of inflation, climbing 18 percent and 13 percent respectively,” the Riyadh-based investment center said. The rate could moderate to five percent in 2009 and four percent in 2010 but it remains high compared to inflation history in the Kingdom, which had recorded one to two percent inflation rates in most years over the past two decades. Between 2002 and 2005, the rate remained below one percent. “While rents are rising due to local factors, global pressures are pushing up food prices... Saudi food prices have moved in line with global food prices (based on the IMF's food price index). With food prices rising faster than we had anticipated and rent rises showing little sign of slowing, we have revised up our forecast for average inflation for 2008 to 6.5 percent,” the study said. As more Fed interest rate cuts are predicted this year to counter a US economic slowdown, the Saudi Arabian Monetary Agency could again follow suit. Experts are forecasting higher inflation rates despite measures turn taken by the government to alleviate the problem.“We expect that SAMA will continue to lower its repo rate in line with the Fed Reserve. The commercial bank reserve requirement may also be raised further from its current level of 10 per cent in order to curb bank lending and absorb some of the inflationary pressures,” Jadwa study further said. “However, these measures alone will not be sufficient to contain inflation, and we expect pressure on the riyal to continue,” it said. SAMA has cut the repo rate on six separate occasions by a total 275 basis points since September to match the Fed rate reductions. This has contributed to money supply growth. The repo rate (the rate SAMA charges for lending) remains unchanged at 5.5 percent. “The effectiveness of this policy has been mixed. Commercial bank lending rates have not been that responsive to lower interest rates, but interbank rates have continued to track the reverse repo rate,” Jadwa said. With the Fed Funds rate at 2.25 percent, there is still scope for further interest cuts (the bottom of the last US rate cycle was just one percent). However, concerns about inflation are likely to limit the Federal Reserve's room for maneuver, according to Jadwa. The SAMA figures showed Saudi M3 soared to a record SR815 billion at the end of January, nearly 3.2 percent above its level at the end of last year and more than 23 percent higher than a year ago. Credits to the private sector grew by around three percent to SR594 billion at the end of January compared to the previous month and by nearly 24 percent a year ago. The figures showed a sharp rise in deposits allowed Saudi banks to expand their lending activity as they swelled to a record SR743 billion at the end of January compared to SR717 billion at the end of December and around SR591 billion at the end of 2006. SAMA has reiterated its commitment to maintaining the exchange rate peg at SR3.75 against the dollar. __
