Gulf central banks face uphill battle

CURRENCY PRESSURE: Economist says GCC central banks’ decisions to peg currencies to dollar has tied policymakers’ hands. (Getty Images)

Gulf states face an uphill battle to control inflation and conduct monetary policy as more US rate cuts are likely to follow Tuesday's emergency cut by the Federal Reserve, a leading economist said on Wednesday.

Howard Handy, chief economist at Saudi bank Samba Financial Group, said GCC central banks' decisions to peg the value of their currencies to the dollar had tied policymakers' hands.

"This is an issue that is going to become harder to deal with, with further interest rate reductions on the part of the US yesterday and more likely," he told newswire Reuters at an annual business and political summit held in the ski resort of Davos.

Handy's comments came the day Gulf states lowered interest rates after the US cut forced them to defend dollar-linked currencies and yield ground to surging prices.

Also speaking in Davos, Bahrain's central bank governor said there would be no change to the Gulf Arab country's policy on its currency peg to the US dollar.

"There is no change in our policy," Central Bank governor Rasheed Al-Maraj told Reuters.

Gulf policymakers are caught in a bind as surging growth and inflation at home increases pressure to relax their dollar pegs at time when US growth and interest rates slump.

"As long as they adhere to their established policy of holding the peg, then they have to look to other options to control inflation," he said. "It just closes off the monetary policy options."

Handy said the Gulf economies remained strong with growth in Saudi Arabia expected at 7% in 2008. (Reuters)

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