JEDDAH, 26 September 2007 -- Speculation and rumors are on the rise that Saudi Arabia, like some members of the Gulf Cooperation Council (GCC), mulls leaving the US dollar peg. The rumors were triggered when Saudi Arabia refused to cut interest rates following the US Federal Reserve's decision.

But for Saudi Arabia and other GCC states, holding on to the dollar peg has become a cause for concern across the Middle East with the inflation rate in the Kingdom alone leaping to 4 percent this year. In other Gulf States the scenario is even worse.

"In my opinion the decision by the Saudi Arabian Monetary Agency (SAMA) to refuse to lower interest rates was the right one," said Dr. John Sfakianakis, chief economist, SABB Bank. "The decision comes at a time when the Kingdom is under extreme inflationary pressures which is one way of compensating for the tension by keeping interest rates high," he said.

Sfakianakis added that just because the US felt it was in its best interest to lower interest rates, doesn't mean that Saudi Arabia must follow suit. He also said that everyone should also keep in mind that deciding to revalue the currency carries a cost and that de-pegging at this time would not be done, in his opinion, based on these factors.

Consumers have also been feeling the heat of the weakening US dollar with consumer prices rising on the back of inflation rates forcing a number of GCC residents to stretch their currencies to the limit in efforts of making ends meet.

Saleh Badualan, a Saudi engineer and father of four, told Arab News that "my salary is SR8,000 per month but due to the high prices of food, clothing and utility bills, it is very difficult to have leftover to treat my kids to leisure activities like going to the local amusement parks. I think de-pegging riyal would be better not only for the Kingdom, but also for the citizens."

"Since Kuwait's de-pegging four months ago, it has not helped the country to lower inflation, rates are still hovering in the double digits," Khan Zahid, chief economist at Riyad Bank, said. The problem, he said, is what is called "home-grown inflation" which translates into too much liquidity in the economy and not enough distribution of goods and services throughout the region.

A SAMA spokesman told Arab News that Hamad Al-Sayari, govenor of SAMA, would be addressing the pressing issue "very soon".

© Arab News 2007