Inflation will be moderate in Bahrain over the remaining months of 2017 as the effects of previous subsidy cuts wear off and global food prices and consumer demand stay subdued, according to a new research note.
Analysts BMI said inflation in the Gulf kingdom is likely to pick up in 2018 amid improving economic conditions and the introduction of VAT, which comes into effect on January 1.
It added that the Central Bank of Bahrain (CBB) will continue to track the US Fed's interest rate hiking cycle to protect the dinar's dollar peg.
Despite having averaged just 1 percent over the first eight months of the year, BMI forecasts Bahraini inflation to come in at 2 percent for 2017 as a whole, as price growth accelerates over the coming quarter.
Upside pressure on prices has eased in the year to date, as the effects of previous subsidy cuts have worn off but inflation has ticked up in recent months - a trend BMI expects will continue into 2018.
The research firm said that rising interest rates will add to liquidity pressures, but as hikes will be small and spread out - and credit demand will stay relatively weak - these look set to remain manageable.
"We expect inflation to decelerate in 2017: price growth has averaged just 1 percent year-on-year in the year-to-date, compared with 3.2 percent in the same period last year," it added.
This is the result of subdued consumer demand amid fiscal consolidation, as well as weak food and fuel inflation.
BMI said house prices are continuing to rise as the housing market remains tight - albeit at a decelerating pace, as a result of the government's residential construction initiatives and efforts to restrict rent increases.
It added that Bahrain's banking system has seen liquidity tighten since the 2014 energy price slump, which prompted fiscal consolidation measures and weakened business and consumer confidence in the economy.
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