RIYADH (Reuters) – Saudi Arabia’s annual inflation reached a 28-month low of 3.5 percent in October, but analysts expect it to increase by end-2009 mainly on a chronic housing shortage and weaker U.S. dollar.
Data from the official statistics authority showed that the cost of living index reached 124.3 points in October up from 120.1 points a year earlier.
Annual inflation in Saudi Arabia has not been this low since June, 2007 when it reached 3.06 percent, but even at this level it remains relatively high in a country that has for almost a decade before 2007 seen inflation below 1 percent.
On month-to-month basis, inflation rose 0.65 percent in October.
“Although inflation has come down on an absolute basis, month on month it still remains high and it could very well average above 5 percent for the year,” said John Sfakianakis, chief economist at Banque Saudi Fransi.
“A slight increase in food prices and high rental costs, as well as dollar weakness, will contribute to inflation remaining historically high.”
Earlier this week, the Saudi central bank gave a mixed view on inflation’s prospects for the rest of 2009 after it rose the first time in four months in September, which coincided with the month of Ramadan, which typically increases consumer demand.
It said the general trend indicates a continued decline in inflation during the fourth quarter of 2009 but noted that the kingdom could face inflationary pressures during the same period although these will be mostly due to seasonal factors.
It did not specify the nature of these seasonal factors.
Monica Malik, regional economist at EFG-Hermes, saw more chance for more inflationary pressures.
“Saudi inflation has either reached or is close to bottoming out. We’re likely to see inflation to pick up from the level seen in October but on average we expect a low inflation level, on average of 4.1 percent in 2010,” she said.
Some of these inflationary pressures will be due to a weakening U.S. dollar.
“We believe in the final quarter and first quarter of next year with a weaker dollar imported inflation will start picking up,” she added.
The dollar, to which Saudi Arabia pegs its riyal currency, has been under downward pressure, which could boost the cost of imports for the major oil exporter, which relies heavily on imports to cater for its food needs.
The Saudi central bank said earlier this month it kept interest rates unchanged in the third quarter, viewing a further rate cut as unlikely to spur lending while a rate hike was unnecessary given tepid inflation.