UAE inflation in danger of hitting 12% this year

INFLATION BATTLE: Merrill said inflation could hit 12% in the UAE this year. (Getty Images)

Inflation in the UAE is in danger of hitting a 20-year high of 12% this year unless the dirham is revalued or depegged from the US dollar, investment bank Merrill Lynch warned on Sunday.

The firm said in a report the absence of a tight monetary policy, combined with strong capital inflows and weak fiscal prudence would likely up drive inflation across the Gulf.

"Inflation is likely to stay on an increasing trend in the short term," the bank said. "With heated domestic demand, pegs to the sliding US dollar not only import inflation and fuel domestic liquidity but, more importantly, they also import easing monetary policy."

Gulf states' peg to the dollar forces them to track US monetary policy at a time when the Federal Reserve is cutting interest rates to stimulate the economy.

Merrill said inflation in Saudi Arabia might average 6% this year, compared with 4% last year, while in Oman inflation may rise to 7.2%, from 4.4% last year, and in Bahrain to 4.5% from 3%.

Despite breaking ranks with neighbouring Gulf states and depegging from the dollar in May last year, Merrill said Kuwait was also likely to see inflation surge in 2008/09 to an average of 6.6% from 4.4% last year due to rising house prices.

The bank said Qatar, which has the highest level of inflation in the Gulf at 14% last year, may see inflation drop slightly to 13% for 2008/09 due to housing supply coming on to the market.

Merrill said inflation would continue to keep pressure on Gulf states to revalue or depeg their currencies from the tumbling dollar.

"In a region with constrained policy choices, we expect currency strengthening to be used as a policy tool in the fight against inflation. Therefore, de-pegging and/or revaluation of the currencies will remain under spotlight," it said, highlighting the UAE and Qatar as the most likely to change their monetary policy.

"In a region with constrained policy choices, we expect currency strengthening to be used as a policy tool in the fight against inflation."

The bank also disagreed with GCC governments' assessment that inflation was just temporary, and said non-market measures such as higher subsidies, allowances, "irrational" wage increases and caps on rents would only mask the problem and not solve it.

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READERS' COMMENTS

INFLATION IN THE UAE
Posted by BUDDHADEB MOOKERJEE, Dubai, U A E on Monday 28 January 2008 at 16:11 UAE time


This is bad news. The economy is already reeling under severe inflationary pressure. The price increases are making survival difficult for the residents. The fixed income group is bearing the brunt of it all. The traders are free to increase the prices of their products and are actually enjoying a bumper profit. Similarly, landlords are making the most of the unreal real estate market and charging exceptionally high rent specially to new tenants. How long will the authorities remain helpless witnesses to their residents' suffering? There are time tested and well known fiscal measures to combat inflation which need to be enforced sooner than later.

INFLATION IN THE UAE
Posted by BUDDHADEB MOOKERJEE, Dubai, U A E on Monday 28 January 2008 at 16:10 UAE time

The economy is already reeling under severe inflationary pressure. The fixed income group is bearing the brunt of it all. The traders are free to increase the prices of their products and are actually enjoying a bumper profit. Similarly, landlords are making the most of the unreal real estate market and charging exceptionally high rent, especially to new tenants. How long will the authorities remain helpless witnesses to their residents' suffering? There are time tested and well known fiscal measures to combat inflation which need to be enforced sooner rather than later.

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