Sept. 20 (Bloomberg) -- Saudi Arabia is likely to keep the riyal's peg to the dollar and a cut in interest rates will ``not help the Saudi economy,'' an adviser to King Abdullah said.

``It's not necessary that there will be a de-pegging of the riyal from the U.S. dollar, not in the near future,'' Ihsan Bu- Hulaiga, who heads a government-appointed finance committee that advises King Abdullah, said in an interview. ``The issue is that we have an abundance of liquidity in the economy.''

Saudi Arabia's annual inflation accelerated to 3.8 percent in July, its fastest since records began in 2000, and there is increasing pressure on the kingdom to take action to tame price rises, much of which is due to the weakness in the dollar.

The Saudi central bank decided against following the U.S. Federal Reserve's half-point reduction in the key interest rate to 4.75 percent on Sept. 18, helping undermine the dollar, which tumbled against 15 of the 16 most active currencies today.

The United Arab Emirates cut its benchmark interest rates by 0.15 percentage point yesterday and Kuwait dropped its repo rate half a point in reaction to the U.S. rate cut.

With domestic prices rising, Saudi Arabia is more likely to face pressure to abandon its currency peg to the dollar, according to analysts at Barclays Capital, Royal Bank of Canada and Resolution Investment Management.

De-Peg Inevitable

Dropping the peg ``appears inevitable as surging oil prices cause booming growth and inflation,'' Stuart Thomson, who helps oversee about $46 billion in bonds at Resolution in Glasgow, Scotland, wrote in a report. ``The link to the weak dollar is providing further pressure on inflation and must be broken.''

Saudi Arabian Monetary Agency Governor Hamad Al-Sayari said Sept. 8 that the kingdom had no plans to de-peg from the dollar.

``The way right now is really not to lower the interest rate,'' said Bu-Hulaiga, who heads the finance committee of Saudi Arabia's 120-member Shoura Council. ``When you are talking about monetary policy, things need to do be done in a small and gradual manner.''

The Saudi inter-bank rate was already about half a point below U.S. rates so ``this actually brings Saudi in line with U.S. rates,'' Brad Bourland, chief economist at Jadwa Investment Co., a Saudi Arabian-based investment bank, said in a phone interview today. ``If there are further cuts though, it might be difficult for them,'' he said.

Any additional reductions in U.S. interest rates will increase pressure on Saudi Arabia to follow.

It ``would give the authorities in Saudi a choice of either getting rid of the peg or allowing interest rates to come lower and we believe they'll definitely choose the latter,'' Steve Brice an economist at Standard Chartered said.

Saudi Arabia has not always followed the Fed's rate cuts, Monica Malik, chief economist at EFG-Hermes Holding said in a telephone interview from Dubai. It did not raise interest rates in 2006 along with the Fed to help revive its sagging stock market, she said.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net; Zainab Fattah in Dubai on zfattah@bloomberg.net

Last Updated: September 20, 2007 09:13 EDT