RIYADH, 31 January 2008 — Saudi Arabia’s central bank governor said yesterday he expected inflation in the world’s largest oil exporter to “stabilize” this year at last year’s 4.1 percent.
“Inflation in 2007 was at 4.1 percent ... we expect it to stabilize in 2008 and I hope it will decline,” Hamad Saud Al-Sayyari told reporters in Riyadh yesterday. He did not give a reason.
Average inflation in Saudi Arabia, which pegs its riyal to the US dollar, hit a 12-year high last year. Al-Sayyari said the Kingdom would revise its reverse repurchase rate, which it uses to track US Federal Reserve policy moves, depending on economic conditions.
A 10 percent rise in rents and 7 percent jump in food prices drove average inflation in Saudi Arabia to its highest since 1995. Annual inflation in the largest Arab economy, which pegs its currency to the dollar, hit a 16-year peak of 6.5 percent in December. Unable to raise interest rates because of the currency peg, Saudi Arabia said this week it is increasing wages for government employees by 5 percent and providing subsidies to cushion the population against inflation.
Saudi Arabia has slashed its reverse repurchase rate — which guides deposit rates — since the US Federal Reserve has reduced its rates by 175 basis points in four policy moves since Sept. 18. At the same time, Saudi Arabia has kept its lending — the repurchase rate — unchanged at 5.5 percent. Al-Sayyari declined to comment on whether the Kingdom had any plan to change currency policy given the prospect of more rate cuts and a slowdown in the US economy.
“The local growth is very strong and I don’t think it will be affected” by a slowdown in the United States, he said.
It would take a “precipitous” decline in the dollar for Saudi Arabia to change the value of its riyal against the US currency, which has been fixed at 3.75 since 1986, vice governor of the central bank Mohammed Al-Jasser said last week.
