Riyadh: Inflation in dollar-pegged Saudi Arabia could cross 10 per cent this year, the country's central bank governor said, the highest since at least the 1970s when Gulf econ-omies boomed on soaring oil prices.

Still, consumer price rises in the world's largest oil exporter could then ease in the second half as anti-inflationary government measures take hold and lower global demand for commodities feeds into prices, Hamad Saud Al Sayyari said.

Inflation in the largest Arab economy almost doubled in the six months to February to at least a 27-year high of 8.7 per cent, as rents surged 18 per cent and food prices jumped 13 per cent.

"If inflation continues to grow at the same pace of the previous months, then it will rise to and can exceed 10 per cent," Sayyari told reporters in the Saudi capital, Riyadh, late on Tuesday.

"But as a result of both expectations of a decline in global demand for commodities because of the US economic slowdown and the effectiveness of the government measures, it might decrease in the second half, but these remain forecasts," he said.

Saudi Arabia, whose main exports consist of oil and petrochemical products, is a major importer of food products and relies heavily on foreign labour.

Various factors

While food prices are contributing to inflation, rising rents, labour, education and medical care costs are also fuelling price rises, said John Sfakianakis, chief econ-omist at SABB bank, HSBC's Saudi affiliate.

"Annual inflation in December could be close to double-digit figures," Sfakianakis said.

Like most states in the world's biggest oil-exporting region, Saudi Arabia is restrained in its inflation fight by a currency peg to the ailing US dollar, which forces it to track US interest rate cuts and makes imports more expensive.

The Saudis have repeatedly ruled out any change to the riyal, which has been fixed at 3.75 to the dollar since 1986.

Instead, the government has introduced cost of living allowances and welfare payments, tightened bank lending curbs, boosted subsidies and slashed import levies and to offset the impact of price rises on its 25 million people. Sayyari pulled back from remarks in February, when he said inflation "will decline" in the second half of the year. Uncertainty about global commodity prices, particularly food items, have made forecasting inflation more difficult.