Drop dollar peg - DIFC economists

DROP PEG: The Gulf central bank should peg the future single currency against a basket of major currencies, DIFC economists have said. (Getty Images)

The planned Gulf Central Bank should peg a regional single currency against a basket of major currencies to help it target inflation and boost confidence in regional investments, DIFC economists said.

Five of six oil-producing Gulf Cooperation Council (GCC) states are preparing for monetary union and are set to decide this week on the location of the Gulf Monetary Council which will form the nucleus of a regional central bank.

Gulf states including Saudi Arabia could form their central bank next year, with a proposed capital equivalent of around $1 billion and foreign reserves of around $100 billion - equal to slightly more than four months of imports, DIFC economists said in a report.

"Our major problem is to control and lower inflation... you need to have the tools to do that... you cannot do that pegged to the dollar. You need an alternative and that could be a basket of currencies," DIFC chief economist Nasser Al Saidi told reporters on Monday.

"A Gulf Central Bank with a monetary policy geared to targeting inflation would generate investor confidence in GCC financial markets," he said.

Inflation is surging across the region where all states except Kuwait peg their currencies to the dollar.

The report said it might make sense to adopt an explicit low medium-term inflation target, for example 2 percent consumer price inflation with an upper and lower limit of 1.5 percent.

International investors and central banks around the world would want to hold assets denominated in the new Gulf currency as a safe haven and a hedge against oil price shocks and inflation, according to the report. (Reuters)

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