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Dollar peg pushes Saudi inflation above official interest rates

Section: Daily Dispatches

Saudi to Debate Riyal-Dollar Peg

From the Gulf Daily News
Manama, Bahrain
Monday, January 28, 2008

RIYADH, Saudi Arabia -- Saudi Arabia's finance minister and central bank governor will appear before a council to discuss the riyal's peg to the US dollar and a surge in inflation, a council member said yesterday.

Inflation in Saudi, which pegs its riyal to the dollar, rose to a 16-year high of 6.5 per cent in December, partly driven by a rise in global commodity prices and the declining US currency.

The Shura Council, whose members are appointed by King Abdullah, will meet Finance Minister Ibrahim Al Assaf and Saudi Arabian Monetary Agency governor Hamad Saud Al Sayyari on February 10, Mohammad Al Zulfa said.

"The finance minister and the central bank governor were invited to debate these issues, discuss this dollar peg debate, its repercussion and what the government plans to do about it," Zulfa said.

The 120-member Shura can review draft legislation and make recommendations, which are not binding on the government.

Saudi Arabia has been trying to offset the effect of higher prices on its 25 million people through measures such as subsidies on imported rice and baby milk, introduced last month by order of the king.

Debate in the Gulf about dollar pegs has intensified because they force central banks to track US monetary policy at a time when the Federal Reserve is cutting interest rates in an effort to stimulate the US economy.

Inflation is now above official interest rates. The negative real interest rate environment could deepen if the Fed cuts again when it meets this week.

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