RIYADH, 25 September 2007 — The Saudi Arabian Monetary Agency (SAMA) reaffirmed its determination to continue its dollar peg policy at the time when Kuwait disentangled from the dollar peg, business daily Al-Eqtisadiah reported yesterday. Saudi riyal registered last week its strongest position against the dollar over the past 21 years. The current speculation that the riyal may ditch its peg to the dollar has fueled riyal-buying frenzy as well.

SAMA declared on Wednesday its intention to adhere to the 5.25 percent interest rate of riyal following the Fed’ s decision to cut the dollar interest rate by 50 points to 4.75 percent, which was at 30-year low against the sterling pound and other major currencies.

Adam Cole, senior strategist for foreign exchange at the Royal Bank of Canada, said recently that the Saudi riyal was unlikely to continue its peg to the US dollar when the riyal’s spot rate was pushed to 3,7405, the highest since December 1986. Cole warned that “the Saudi move may lead to the further erosion of confidence in the US dollar, as its role as a currency reserve has come under suspicion.”

Local economic experts believe that SAMA’s decision to keep its interest rates unchanged is the first step toward the dissociation of riyal from dollar and revaluation against major currencies.

Yasin Jefery, a Saudi economic analyst, said “keeping the riyal interest rate unchanged is the first step toward changing the riyal’s peg to dollar.”

SAMA Governor Hamad Al-Sayari said early this month that the finance ministers and governors of central banks in the Gulf would meet in October to discuss Gulf’s unified currency plan which was earlier set for implementation by 2010.

M3, the broadest measure of money circulating in the economy, rose 21.5 percent to 725.71 billion riyals ($193.5 billion) on July 31, compared with a year-earlier, SAMA figures showed last month.

That was the fastest annual increase since November 2004, based on International Monetary Fund data.

Money supply grew 18.4 percent in June.

Saudi inflation hit a seven-year high of 3.83 percent in July as rents rose at their fastest pace since at least 2004, and a currency pegged to a sliding dollar helped drive up the cost of food imports.

The largest Arab economy is surging on a tripling in oil prices since 2002, fuelling lending to billion-dollar infrastructure and real estate projects.

The total value of new loans in Saudi Arabia averaged SR6.4 billion per month in the first seven months of the year, compared with 3.7 billion per month riyals last year, said Muhammad Younas Malick, senior economist at Saudi Arabia’s National Commercial Bank.

“The economy is booming,” Malick said. “Corporate lending is the main driver of money supply growth as we see more private sector investment and project financing.”

Lending income helped Saudi banks stem a slide in profit growth spurred last year by declining stock market-related revenue.