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Saudi Arabia Maintains Control over Inflation at 2.3%

A food and consumer goods markets in Saudi Arabia (Asharq Al-Awsat)
A food and consumer goods markets in Saudi Arabia (Asharq Al-Awsat)
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Saudi Arabia Maintains Control over Inflation at 2.3%

A food and consumer goods markets in Saudi Arabia (Asharq Al-Awsat)
A food and consumer goods markets in Saudi Arabia (Asharq Al-Awsat)

Saudi Arabia’s government has effectively managed to contain inflation, slowing it down to its lowest level in a year, recording 2.3% in July compared to 2.7% in the same month of the previous year.

This was even lower than the 2.7% recorded in June.

The government’s control over the inflation rate is the result of economic measures and actions it swiftly undertook early on to confront the global surge in prices.

Experts interviewed by Asharq Al-Awsat emphasize the significance of the decrease in actual housing rental rates in July, which stood at 10.3 %, down from 10.8 % in June. This factor has played a pivotal role in reining in the inflation rate in the Kingdom.

Notably, housing rental costs constitute the largest sub-category in the consumer price index, accounting for 21 % of the index weight.

Experts also highlight the contributions of government initiatives and programs related to the real estate and housing sector in boosting the supply of real estate products in general, particularly residential apartments.

This has had a direct impact on rental prices. Additionally, the reduction in real estate financing due to the recent interest rate hike by the Saudi Central Bank has also played a role.

Mohammed Makni, a finance and investment professor at the College of Economics and Administrative Sciences at Imam Muhammad Ibn Saud Islamic University, explains that the inflation rate has experienced consecutive declines in the past three months, attributed mainly to the ongoing interest rate hikes by the Saudi Central Bank.

“In July of the previous year, the Federal Reserve decided to raise the interest rate by 25 basis points, and Saudi Arabia followed suit by raising its interest rate by the same level. This reduced the liquidity in the local market and consequently impacted the inflation rate,” Makni told Asharq Al-Awsat.

“According to the latest statistics from the Saudi Central Bank, consumer loans during the second quarter of the current year have witnessed a decrease, reaching 443 billion riyals ($118.1 billion), confirming the Kingdom's approach of draining liquidity from the local market,” he added.

Makni further elucidates that most activities in the Consumer Price Index during July showed a positive change. He anticipated the inflation rate to remain stable around 2% to 2.5% in the coming months, depending on the decisions taken by the US Federal Reserve.

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Dollar Strengthens on Elevated US Bond Yields, Tariff Talks

A teller sorts US dollar banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya February 16, 2024. REUTERS/Thomas Mukoya/File photo
A teller sorts US dollar banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya February 16, 2024. REUTERS/Thomas Mukoya/File photo
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Dollar Strengthens on Elevated US Bond Yields, Tariff Talks

A teller sorts US dollar banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya February 16, 2024. REUTERS/Thomas Mukoya/File photo
A teller sorts US dollar banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya February 16, 2024. REUTERS/Thomas Mukoya/File photo

The dollar rose for a second day on Wednesday on higher US bond yields, sending other major currencies to multi-month lows, with a report that Donald Trump was mulling emergency measures to allow for a new tariff program also lending support.

The already-firm dollar climbed higher on Wednesday after CNN reported that President-elect Trump is considering declaring a national economic emergency as legal justification for a large swath of universal tariffs on allies and adversaries.

The dollar index was last up 0.5% at 109.24, not far from the two-year peak of 109.58 it hit last week, Reuters reported.

Its gains were broad-based, with the euro down 0.43% at $1.0293 and Britain's pound under particular pressure, down 1.09% at $1.2342.

Data on Tuesday showed US job openings unexpectedly rose in November and layoffs were low, while a separate survey showed US services sector activity accelerated in December and a measure of input prices hit a two-year high - a possible inflation warning.

Bond markets reacted by sending 10-year Treasury yields up more than eight basis points on Tuesday, with the yield climbing to 4.728% on Wednesday.

"We're getting very strong US numbers... which has rates going up," said Bart Wakabayashi, Tokyo branch manager at State Street, pushing expectations of Fed rate cuts out to the northern summer or beyond.

"There's even the discussion about, will they cut, or may they even hike? The narrative has changed quite significantly."

Markets are now pricing in just 36 basis points of easing from the Fed this year, with a first cut in July.

US private payrolls data due later in the session will be eyed for further clues on the likely path of US rates.

Traders are jittery ahead of key US labor data on Friday and the inauguration of Donald Trump on Jan. 20, with his second US presidency expected to begin with a flurry of policy announcements and executive orders.

The move in the pound drew particular attention, as it came alongside a sharp sell-off in British stocks and government bonds. The 10-year gilt yield is at its highest since 2008.

Higher yields in general are more likely to lead to a stronger currency, but not in this case.

"With a non-data driven rise in yields that is not driven by any positive news - and the trigger seems to be inflation concern in the US, and Treasuries are selling off - the correlation inverts," said Francesco Pesole, currency analyst at ING.

"That doesn't happen for every currency, but the pound remains more sensitive than most other currencies to a rise in yields, likely because there's still this lack of confidence in the sustainability of budget measures."

Markets did not welcome the budget from Britain's new Labor government late last year.

Elsewhere, the yen sagged close to the 160 per dollar level that drew intervention last year, touching 158.55, its weakest on the dollar for nearly six months.

Japan's consumer sentiment deteriorated in December, a government survey showed, casting doubt on the central bank's view that solid household spending will underpin the economy and justify a rise in interest rates.

China's yuan hit 7.3322 per dollar, the lowest level since September 2023.