Gulf currency union could measure core inflation

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CURRENCY BASKETS: Only Kuwait has so far ditched the dollar peg ahead of monetary union. (Getty Images)

Gulf Arab oil producers are discussing modifying the inflation criterion of their monetary union plan to measure core inflation, which strips out the impact of soaring rents, a Qatari official said on Sunday.

Five Gulf states, including Qatar and Saudi Arabia, are preparing for monetary union - including a single currency - by a 2010 deadline that many policymakers have said would be very difficult to meet.

An inflation target of no more than 2 percent above the regional average has been the most contentious of the European Union-style convergence criteria agreed by Gulf states.

Consumer price inflation (CPI) ranges from 3.1 percent in Bahrain to almost 15 percent in Qatar.

Under a proposal discussed by a regional technical committee on Sunday, the inflation target would measure core inflation, which strips out the housing and rental costs that have driven inflation in some states.

"Consumer price inflation is not a good measure for the purposes of monetary policy because it contains volatile components that we want to get rid of," said the Qatari official involved in the talks.

"We are proposing looking at the underlying long-term inflation, the components of CPI that create persistent inflationary pressures," the official said, declining to be identified.

The benefits of measuring core inflation would be discussed on Sunday by officials of the six Gulf Cooperation Council (GCC) states, according to an opening speech prepared by the Qatari central bank.

Prices have been soaring in the Gulf as governments invest windfall oil revenues into economic diversification, which has created a mismatch between supply and demand for housing, especially in Qatar and the United Arab Emirates.

The Qatari central bank completed a study that showed housing prices were the most-volatile component of inflation in the country, the official said. "CPI has been creating more divergence, and we want convergence."

Gulf Arab states should consider dropping their pegs to the US dollar to have more tools to control inflation and achieve single currency criteria, Dubai International Financial Centre (DIFC) economists said in August.

In 2007, the weighted average Gulf inflation rate was 6.9 percent, a level exceeded by the UAE and Qatar, the DIFC said.

States in the world's biggest oil-exporting region are giving a renewed push to completing monetary union after the project was thrown into question when Oman decided in 2006 it would not join and Kuwait dropped its dinar's dollar peg in 2007.

In June, Gulf central bank governors finalised a draft monetary union deal and agreed on the rules for setting up a monetary council that will form the nucleus of a regional central bank.

Gulf central bank governors and finance ministers will meet next week in Jeddah, and are likely to finalise both agreements, which would then be taken to Gulf Arab rulers at a meeting in November or December.

Several policymakers, including the Saudi and UAE central bank governors, said this summer meeting the 2010 deadline would be challenging. (Reuters)

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