Saudi Arabia will probably keep its currency pegged to the dollar at the same value for the foreseeable future because factors other than trade, like rents and food, are driving inflation, Deutsche Bank said in a report. Higher government spending rather than lower interest rates are likely to keep up the pressure on inflation in the Kingdom because people in Saudi Arabia tend to rely more on savings and non-bank resources to finance consumption, Deutsche said. The world's largest oil exporter, which has kept its currency fixed to the dollar at SR3.75 since 1986, has repeatedly said it is committed to the peg because it helps encourage foreign investment. “There was some appreciation for the view that, to the extent that tradable inflation exists, a stronger currency would help limit gains,” Deutsche said in a note received on Wednesday. “Rents and food price inflation, however, were cited as more dominant drivers,” the bank said, after meeting with Saudi central bank officials. As the US Federal Reserve slashes interest rates to help ward off recession, some investors are betting Saudi Arabia and its neighbors will either revalue their currencies or sever their pegs altogether to combat near-record inflation. “We retain our view that Saudi Arabia will maintain the current peg until the end of our forecast horizon (2009),” said Deutsche Bank. The bank expects the United Arab Emirates and Qatar to sever their dollar pegs this year and track currency baskets as Kuwait did last May. Interest rate cuts by the Saudi Arabian Monetary Agency take a long time to follow through to bank deposit and lending rates, Deutsche said. “While we continue to believe that a US-led monetary policy is not the optimal situation for Saudi Arabia, this low interest rate transmission channel reduces the inflationary risks from the current situation,” the bank said. Inflation in the Kingdom jumped to 7 percent in January, its highest since at least 1981, as rents surged almost 17 percent. Markets expect the Fed will slash rates by another 75 basis points before the end of the month to 2.25 percent. As the Fed cut rates by 225 basis points to 3 percent since September 18, Saudi Arabia has followed by reducing only its reverse repurchase rate, which guides deposit rates, to the same level in order to deter bets on an appreciation of the riyal. It has kept its repurchase rate, at which banks borrow from the central bank, steady at 5.5 percent, in order to prevent lower borrowing costs from stoking inflation, vice-governor of the kingdom's central bank told Reuters last month. __
