UAE inflation surges to 13% - Merrill

INFLATIONARY PRESSURE: An economic slowdown in the second half of the year is expected to provide some inflationary relief. (Getty Images)

Inflation in the UAE hit 13 percent in the first half of this year on the back of surging housing and food costs, Merrill Lynch said in a report on Tuesday.

The US investment bank said inflation, which officially stood at 11.1 percent in 2007, is still a “major problem” for the Gulf state and will only be solved through more stringent monetary policy.

Merrill said the UAE’s currency peg to the weak US dollar and negative real interest rates, combined with the country’s booming economy, continue to pile on inflationary pressure.

While the recovering US dollar will help curb imported inflation, the economy is still growing significantly above its potential, it said.

The bank said the UAE economy is expected to slow in the second half of the year and this, combined with the government’s attempts to take the heat off the real estate sector, should help reduce inflationary pressure.

”The monetary and fiscal policies still remain expansionary, but policymakers have acted more responsibly lately, introducing regulatory changes that will support some degree of disinflation,” it said in the report on the UAE economy.

Merrill predicted the economy will grow 7.2 percent this year, down from 7.4 percent in 2007, as slower credit growth and lower oil prices in the second half dampen the economic surge during the first six months.

GDP growth in the UAE has averaged just under 10 percent over the last five years.

“More expensive and less available funding, and a slowdown in credit growth, is likely to slow the UAE’s already overheated economy,” the bank said.

Despite the drop in the price of oil from its highs in July, prices are still almost 60 percent higher than last year, averaging around $115 a barrel, compared to $72 in 2007.

Merrill said it expects total UAE oil revenues should reach $120 billion in 2008 if oil prices average around $110 a barrel this year.

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