Saudi Arabia’s largest state bank has urged the government to consider altering the riyal’s peg to the US dollar and to diversify its assets by setting up a sovereign fund to boost returns and reduce exposure to the US currency.

The statement by National Commercial Bank’s chief economist comes amid intense pressure on the government to tackle rising inflation and consider the first riyal revaluation in 21 years.

The central bank has previously ruled out changing the peg, saying the effect of dollar weakness on inflation was relatively small.

However, Said Alshaikh, the NCB’s chief economist, said it was time to reconsider “provided that it is done gradually”, arguing that the effect of inflation had extended to the middle class and was no longer confined to the lower-income population.

There has also been speculation about how best to manage its oil wealth as the kingdom enjoys large budget surpluses following the deficits of the 1990s.

The central bank has acted as the sovereign wealth fund but has invested conservatively. It is estimated that 85 per cent of foreign reserves – currently at a record $285bn – are invested in dollar-dominated fixed-income securities. Mr Alshaikh said: “It would probably make more sense to use these resources in other types of assets across regions and in different currencies in order to maximise returns . . .”

Given the reserves, Mr Alshaikh estimated that any fund should be able to start with between $100bn and $150bn.

The government owns about 80 per cent of NCB but Mr Alshaikh’s comments do not represent official policy. However, he is thought to be the first prominent Saudi banker to urge the authorities publicly to create a sovereign fund.

The authorities have been considering various options for outside investments as they look at avenues to diversify holdings.

Both the central bank and finance ministry deny they are about to set up a separate sovereign wealth fund.

The central bank has said that enabling the Public Investment Fund, which has massive domestic holdings, to invest more aggressively overseas is under consideration.

PIF declined to comment, but said “significant developments” would be achieved in the next few weeks.

While sources inside Saudi Arabia say the PIF unit is likely to start off relatively small, in typical Saudi fashion, with as little as 20bn riyals, bankers abroad are expecting much larger sums to be deployed.

People familiar with Saudi plans, however, caution that the debate within the highest echelons of power is continuing, and key issues such as who would be the manager of any fund and how much it would have under-management are still being discussed.

Other ideas on the table include setting up other types of funds under the finance ministry to invest both domestically and abroad with the view to broaden asset management, but also to support investment and attempts to diversify the kingdom’s economy through overseas acquisitions.

Mr Alshaikh said the timing for a fund was opportune because some foreign entities, particularly financial institutions, had become attractive with the subprime crisis and a slowdown in the US and parts of Europe.

“I look at it also from the point of view that this is an opportune time to buy given that prices are attractive and at the same time you have the resources.”