Saudi Arabia's money supply growth, an indicator of future inflation, hit its highest in at least four years in January.

This signals inflation in the world's largest oil exporter could accelerate from a 25-year peak.

M3, the broadest measure of money circulating in the Saudi economy, grew to 815.14 billion riyals ($217.4 billion) at the end of January compared with 657.92 billion riyals a year earlier, the Saudi Arabian Monetary Agency said on its Web site.

Money supply growth was 19.6 percent in December, easing slightly from November after the central bank tightened bank lending curbs.

"The high growth in money supply is partially indicative of a booming economy but continues to add to the inflationary pressures. In such an environment the challenge is to regulate money supply in a declining interest rate environment as well as minimise unproductive debt expansion," said John Sfakianakis, chief economist at SABB bank.

Inflation in the largest Arab economy, which pegs its riyal currency to the dollar, hit a quarter-century peak of 7 percent in January as rents surged 16.7 percent.

The central bank's room for manoeuvre for combating inflation is limited by its need to track US interest rates given the peg.

The kingdom has raised bank reserve requirements twice since November, forcing banks to keep more money in their vaults as the US Federal Reserve slashed interest rates by 225 basis points since September.

The Saudi central bank raised the reserve ratio to 9 percent from 7 percent in November, and increased it again in January to 10 percent.

In January, demand deposits grew 31.6 percent to 326.77 billion riyals, versus growth of 27.9 percent in December. Time and savings deposits were up 30.6 percent in January versus 25.2 percent in December.

Revaluing the currency would not necessarily help reduce inflation because the imported element is limited and money supply growth is being driven by government spending, Mohammed al-Jasser, vice governor of the central bank, told Reuters last week.

Inflation would probably not ease until next year, when new housing comes into the market to meet demand, Jasser said, adding that money supply growth was being spurred by government spending.

Saudi Arabia, which has not changed the value of its riyal to the dollar in 22 years, lowered its reverse repurchase rate, which guides bank deposit rates, by 2 percentage points after the Fed cuts. It has kept its repurchase rate, which guides lending rates, steady at 5.5 percent.

The central bank is unlikely to cut its repurchase rate in response to further easing by the Fed as it seeks to stem money supply growth, Jasser said. - Reuters