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Saudi inflation rate to remain subdued despite the liquid state of economy

The Saudi economy has relished with large influxes of oil revenues and has kept a strong foothold with sound economic indicators. The increase in oil prices coupled with a rise in production levels were triggered by geopolitical tensions aiding the economy. Accordingly, the monetary state has been expanding as M0, the monetary base, increased by 8.4 percent during August on an annual basis, rising to SR307.6 billion. The main driver for M0’s growth was banks’ deposits with SAMA (Saudi Arabian Monetary Agency) which rose by 11.4 percent, the National Commercial Bank (NCB) said in its Saudi Economic Review released on Wednesday.

Meanwhile, cash in vault grew by 6.8 percent annually to bring total bank reserves to SR166.1 billion by the end of August. SAMA has shown the ability to control the increasing monetary levels in the local economy by absorbing liquidity to avoid inflationary pressures domestically. In addition, currency outside banks picked up by 5.9 percent during August as consumers were in the peak of Ramadan expenditure season.

SAMA’s macroprudential policy will contain potential liquidity risks by its willingness to use conventional tools such as treasury bills. Consequently, the broader measure of money supply, M3, decelerated to record a gain of 13.8 percent on an annual basis.

On a monthly basis, the NCB report said M3 declined from its all-time high of SR1.47 trillion during July to SR1.46 trillion by the end of August. The highlight of the month was the sizable growth in time and savings deposits. Amid the globally suppressed interest rate market and the bullish momentum of the local stock market during August, time and saving deposits managed to gain a significant 11.2 percent, the fastest pace since October 2012. Meanwhile, the largest component of M3, demand deposits, continues to expand rapidly by posting an annual 19.1 percent growth rate. Furthermore, other quasi-monetary deposits decelerated significantly and only increased 2.7 percent during August in comparison to the same month of 2012.

Consumer prices have been contained and the benchmark inflation rate recorded a 3.5 percent annual rise during August. The recently rebased index peaked at 3.96 percent last April, but since then, policy makers have been pro-active in subduing any inflationary pressures. Imported inflation considerably influences local prices given the heavy reliance on imports.

Food prices remain the leading category driving up prices as the sub-category accelerated by 6.5 percent. Interestingly, the category of furnishings and household equipment witnessed a second consecutive rise in annual prices at 5.9 percent. The category holds a weight of 9.09 percent within the index. Furthermore, rental prices were supported higher by the academic holiday and Ramadan season. Real estate prices remain a priority concern for consumers as the youth population seek to own their assets. However, elevated prices have been a major burden for the majority of citizens and the situation is yet to be mended by the mortgage law. The inflation rate is expected to remain subdued despite the liquid state of the economy. “We do not foresee the index rising to 4 percent within 2013 with upside risks in 2014 as the expected drop in the USD, given the US tapering intentions, will contribute to higher imported inflation,” NCB said.

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