The Saudi economy continues to maintain an upward trajectory and record robust growth figures despite the fragility of the global economy. This has been partially driven by utilizing large amounts of excess liquidity and benefiting from the cautious approach of the financial system last year.

The monetary base (M0) recorded its slowest growth as it remained almost stagnant during June with a 0.2 percent annual change, a slight gain of SR510 million. This was mainly attributed to local banks withdrawing SR10.4 billion from SAMA (Saudi Arabian Monetary Agency) as their deposits now rest at SR120.7 billion, the lowest level this year. Meanwhile, cash in vault and currency outside banks rose by 23.1 percent and 7.5 percent, respectively, on an annual basis due to the Ramadan season. This is expected to slow down after the holy month and pick up again during Haj, according to a report by the National commercial Bank released here yesterday.

As for broad money (M3), growth remained well below 2011's performance, recording 9.8 percent Y/Y during June. However, it comes as a healthy rebound from May's growth of 7.7 percent Y/Y. The main driver of M3 continues to be demand deposits which gained by 14.4 percent in June over the same month last year. Nonetheless, the level of demand deposits has somewhat stagnated during the second quarter of 2012 on a monthly basis. Meanwhile, time and saving deposits have held their positive trajectory for the seventh consecutive month as they expanded by 3.6 percent Y/Y. Despite experiencing suppressed interest rates, the local banking system managed to attract time and saving deposits and increase their share of M3 to 24 percent following their record low figure of 23 percent during April.

According to the NCB report, their growth to remain sluggish throughout the third quarter of 2012. Additionally, M3 to post an annual growth for 2012 at 10.9 percent, a more conservative figure than the International Monetary Fund's (IMF) 12.2 percent projection.

Inflationary pressures have eased once more as June's rate dropped to 4.9 percent, the lowest level since August 2011. The drop was mostly attributed to the decelerating rate of real estate and rental prices which fall under the category of renovation, rent, fuel & water.

The elevated prices have prompted officials to follow through with the mortgage law. However, the effect of the soon to be formulated law is still to be seen and is expected to have an impact over the medium and long term. During June, the category of renovation, rent, fuel & water posted an annual rate of 8.8 percent, the lowest this year. Additionally, food and beverage prices recorded 4.7 percent Y/Y as Ramadan drives prices upward.

Furthermore, imported inflation has a great influence on local prices as the economy heavily relies on imports. Similar to M0 components, local food prices should ease for coming few months and pick up again as we near Haj. Nevertheless, the inflation rate is projected to remain between 4.5 percent – 5 percent for 2012, the NCB report said.

Given the fact that the Saudi riyal is pegged to the US Dollar, the benchmark policy rate is expected to remain unchanged for an extended period. The IMF has recently remarked on the conduct of Saudi monetary policy as "the use of macroprudential and liquidity management tools remains key to effective policymaking". The Saudi Arabian Monetary Agency has steered the Saudi economy through the global financial crisis and is keen on supporting and maintaining the growth of the economy by managing its monetary tools effectively, the NCB report said.