In July, SAMA net foreign assets grew 9.1 percent year on year, including a 0.5 percent monthly rise, to SR1.56 trillion ($416.98 billion), the fastest pace of growth in 14 months. Oil prices averaged $76 a barrel in July.

Despite the lack of monetary pressures, however, inflation is beginning to re-enter the radar screen. The Kingdom's inflation rate jumped to a 17-month peak of 6 percent in July, stemming from rises in food prices, rents and general goods and services.

Saudi bank claims on the private sector - a measure that includes bank credit and investments in securities - expanded 4.9 percent in July, up from 4.4 percent in June and the fastest rate of growth in more than a year. The bank credit component accelerated to an annual 3.4 percent rate of growth, up from 3% in June. Bank lending has gradually gathered speed for the first seven months of 2010 from virtually no annual growth in January to a cumulative rise of 3.2 percent by July.

Put into context, loan growth is very slowly recovering from a low base and is negligible when compared with rates exceeding 20 percent, and often 30 percent, in 2008. While they do boast ample liquidity, Saudi banks continue to be wary about extending new corporate credit as they continue to take provisions to guard against possible non-performing loans. In July, bank claims on the private sector grew 0.6 percent from June, slightly below the month-on-month rate of 0.9 percent recorded in June. There has, therefore, been very little credit growth momentum despite government efforts to push ahead with strategic infrastructure projects. Bank claims on the public sector increased almost 4 percent in the month to July, following three months of contractions. The SR205.69 billion in public sector claims were still down 1.5 percent from the year earlier. New loan growth in July was largely comprised of facilities carrying short-term maturity (less than one year) . That category grew 2.4 percent, while medium and long-term credit declined.

The pace of Saudi consumer lending growth picked up in the second quarter, reaching almost 10 percent compared with 7.2 percent in the first quarter, according to SAMA data. In the three months to June 30, real estate finance surged 30 percent from the year earlier while auto finance was up 6.2 percent. Credit card lending, by contrast, fell 5.2 percent over the same period, as banks are carefully assessing their client base and risk profile.

In July, broad money supply (M3) contracted slightly (-0.07 percent) from June, while the annual rate of growth fell to 2.3 percent. M2 money supply growth also fell to 5.1 percent in July from 6.9 percent in June. The slowdown in money supply growth can be linked to a 4.7 percent monthly drop in time and savings deposits in July. M1, reflecting liquid funds including currency outside of banks and demand deposits, grew 2.1 percent.

Banque Saudi Fransi (BSF) continue to expect growth in broad money supply of 7 percent in 2010 as higher rates of credit growth and decent macro-economic continue to filter through into the wider economy. M3 had witnessed its biggest monthly improvement in 16 months in June. It is likely that money supply will resume growth following Ramadan and the Eid holiday, which ends in mid-September. Should money supply growth remain at an annual 2 percent-3 percent, however, this could over time be an indicator that the economy is poised for lower-than-expected growth. The bank still expects real economic growth of 3.9 percent this year on greater oil sector expansion and investments and a pick up in the government and private sectors compared with last year, when growth was a low 0.6 percent. High government spending is not having an immediate pass through effect in money supply and is not, hence, generating any direct inflationary pressures.

For months, there has been a notable shift of funds into non-interest bearing demand deposits in favor of interest-bearing time and savings deposits. Some 52.7 percent of total bank deposits in Saudi Arabia were held in demand deposits at the end of July, compared with 41.8 percent at the beginning of 2009. Between January and July, demand deposits grew 14.8 percent, while time and savings deposits declined 10.4 percent. Saudi banks' loan-to-deposit ratio - which had fallen as low as 78.4 percent in December - rose slightly to 80.8 percent in July from 80.5 percent in June. In late 2008, the ratio surpassed 90%.

SAMA has kept interest rates unchanged for more than a year; its repurchase rate has remained steady at 2 percent since January 2009 and its reverse repurchase rate at 0.25 percent since June 2009. This policy remains relevant and consistent with the lack of momentum in private sector credit growth as SAMA continues to send a signal to banks to elevate the pace of loan growth, necessary to support a balanced economic recovery. Bank profitability continues to be subdued in the Kingdom as lenders set aside provisions for possible non-performing loans and adopt cautious attitudes toward new lending. As of July, cumulative bank profits were down 12.1 percent year on year, SAMA data show.

Banks reduced their holdings in the central bank's reverse repo window by 25.3 percent in July, a drop of almost 20 percent from June. Their foreign asset holdings in the same month rose 23.5 percent.

Furthermore, there is little that SAMA can do with monetary policy maneuvering at this stage to quell accelerating price pressures that led inflation to accelerate to 6 percent in July from 5.5 percent in June - the highest inflation rate since February 2009. Food and beverage inflation rose to 7 percent in July from less than 1 percent last December, stemming from both higher global commodity prices and rising domestic demand as consumers prepared for the Islamic month of fasting which began Aug. 11. Anecdotal evidence shows food prices rose sharply for many items, such as dates, which are up about 10 percent and meat, which has witnessed rises of 7-15 percent. Food and beverages have the biggest weighting on the index of 26 percent, followed by rents and utilities at 18 percent. Rental inflation, while still a steep 8.9 percent, has been decelerating year-on-year for past seven months.

The main thrusts behind accelerating inflation, hence, have been food prices and other goods and services, which rose at an annual 9.1 percent in July.
 
John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh.)