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Financials

UPDATE 1-Saudi inflation pressures worrying - c.bank gov

* Sees economic growth of at least 3.5 pct in 2010

* Saudi central bank sees no need to change interest rates

* Says “very satisfied” with lending, budget seen in balance

* Highlights of c.bank governor comments: [ID:nLDE68P07R]

(Adds quotes and details)

By Souhail Karam

RIYADH, Sept 26 (Reuters) - Saudi Arabia’s central bank governor on Sunday said monetary policy can do little to tame a “worrying” inflation rate that is driven by factors outside his reach, such as a surge in food prices.

Consumer price growth in the world’s top oil exporter and the biggest Arab economy climbed to an 18-month high of 6.1 in August, far above levels seen in other Gulf oil producers, but still below 2008 record double-digit peaks.

“At 6.1 percent, the inflationary pressures are worrying,” Muhammad al-Jasser told an annual news conference. “We are monitoring them.”

“The tools we have of course are very much in terms of watching our money supply and what’s happening on the fiscal side of our economy,” he said.

Jasser said there was ongoing coordination with the government to manage fiscal policy in a way that would not exacerbate inflationary pressures.

The Saudi finance minister told Reuters in May that the country will not push spending beyond its 2010 plan to keep inflation under control. [ID:nLDE64P1J7]

The OPEC member's tools to battle inflation are limited by its currency peg to the U.S. dollar. It needs to keep its interest rates close to U.S. benchmarks USFFTARGET= to avoid excessive pressures on the riyal currency.

“The system has ample liquidity, the reverse repo is at 0.25 percent, and since there are no pressures on the system of liquidity, there has not been a change recently,” Jasser said.

The central bank last changed its reverse repo rate in June 2009, when it cut it by 25 basis points. Its repo rate stands at 2.0 percent since January last year.

While Saudi Arabia’s chronic housing shortage fuels rent and residential property prices, the global agricultural output will be critical to the action the Gulf Arab desert kingdom -- an important rice, wheat and sugar importer -- would need to implement to counter inflation, Jasser said.

ECONOMIC OUTLOOK

The Saudi economy is now likely to grow by at least 3.5 percent this year helped mainly by more stable oil prices, Jasser said, after anaemic growth in 2009.

The central bank is also satisfied with loan growth to private sector, which reached 4.9 percent in August, Jasser said. He was also optimistic that the 2010 budget would reach a balance instead of an originally planned 70 billion-riyal deficit ($18.7 billion), adding this suggested there was no need for sovereign bond issues for now. [ID:nLDE5BK1CN]

The budget shortfall stood at 86.6 billion riyals or 6.2 of gross domestic product in 2009, higher than a 45 billion gap estimated in December, the central bank’s annual report showed on Sunday. [ID:nLDE68P086]

During a meeting with King Abdullah on Saturday, the governor said the kingdom needs to tame growth in its domestic oil and gas consumption, which are too big for both its population growth and the size of its economy. [ID:nLDE68O0CA] ($1=3.750 Saudi Arabian Riyals) (Editing by Louise Heavens)

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