Annual growth in Saudi money supply, an indicator of future inflation, eased for the second consecutive month to 20.85 percent in July from 21.34 per cent in June, the central bank said on Tuesday.

M3, the broadest measure of money circulating in the Saudi economy, hit 877.05 billion riyals ($233.9 billion) at the end of July compared with 725.71 billion riyals a year earlier, the Saudi Arabian Monetary Agency (SAMA) said in a monthly report on its website.

Annual inflation in June rose 10.6 percent against 10.4 per cent in May despite a 30 basis points decline in annual money supply growth in June.

The drop in July's annual money supply growth follows steps taken by SAMA over the past 10 months which nearly doubled reserve requirements banks have to make to soak up liquidity.

The decrease could also be due to the summer season during which thousands of Saudis take money from their accounts for their holidays, said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi subsidiary.

"On month to month basis, we are still seeing that money supply is increasing although at lower pace than in the first half of 2007," Sfakianakis said.

SAMA is also showing greater vigilance in maintaining banks' assets to deposits ratio at the required 85 per cent to control liquidity, which has led to an increase in borrowing costs, especially on the corporate lending side, bankers said.

The three-month Saudi Interbank Offered Rate (SIBOR) was at 4.109 percent on Tuesday against 3.6pc a month earlier year because of tight fund availabity and high demand especially for project financing.

But the decline in July's annual money supply's growth does not necessarily mean that inflation will decline in the next few months, which will see the start of both Ramadan and the new school year as well as religious celebrations, he said.

"Because we are entering a high spending season and because inflation has more to do with government and consumer spending than with monetary policy, we should expect inflation to rise in July driven by the costs of goods and services," he added.

The central bank's total net foreign assets hit 1.5 trillion riyals at the end of July compared with 942.4 billion riyals a year earlier, it added. - Reuters