Annual growth in the Saudi money supply rose for the first time in three months in August but the Arab world's largest economy is beginning to feel strains of a liquidity squeeze, central bank data showed.

The annual growth of money supply, an indicator of future inflation, reached 21.8 percent in August, up from 20.85 percent in July, according to monthly data released by the Saudi Arabian Monetary Agency (Sama).

M3, the broadest measure of money circulating in the economy, hit 885.77 billion riyals ($236.2 billion) at the end of August, compared with 727.15 billion riyals a year earlier, Sama said.

Annual inflation eased off from a peak of at least 30 years to 10.9 percent in August, compared to 11.1 percent in July.

Demand deposits, the largest component of M3, recorded a 1.95 percent month-to-month fall in August, its strongest decline in at least a year and a second monthly drop in a row, to 342.31 billion riyals, which was its lowest level since April of this year.

Bank claims on the private sector also recorded in August their lowest monthly rise in at least 12 months. They rose 1 percent which is less than half the average monthly growth in the seven months to July, 2008.

Sama's governor Hamad Saud Al-Sayyari told Reuters last month that banks in the world's largest oil exporter are not facing a shortage of funding, although he said the bank could open new windows for any future liquidity needs.

The bank has raised interest rates steadily and tightened reserve requirements four times since last November, to 13 percent from 7 percent, due to a flood of foreign investor cash which had raised liquidity and bolstered inflation.

But interbank rates in Saudi Arabia have more than doubled since early May as credit markets tightened and investors withdrew bets on Gulf states revaluing their dollar-pegged currencies to fight inflation.

Saudi bankers said this week the shift in liquidity meant the central bank should consider reducing the reserve ratio to free up more funds for banks.

The global liquidity crunch has hit banks across the Gulf, making it hard to finance major infrastructure, real estate and industrial projects in the midst of an economic boom.

Sama's total net foreign assets hit 1.56 trillion riyals at the end of August compared with 930.7 billion riyals a year earlier, Sama added. -Reuters