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Wed 18 May 2011 06:55 PM

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Annual inflation in Bahrain, UAE falls in April

Political unrest hits Bahrain's tourism as inflation falls for second consecutive month

Annual inflation in Bahrain, UAE falls in April
Bahrain and the UAE both saw annual inflation fall in April. (Getty Images)

Annual inflation in Bahrain fell for a second consecutive month in April as political unrest hit tourism and domestic demand, data showed on Wednesday, while consumer prices in the UAE also eased.

Prices in Bahrain fell by 2.3 percent year-on-year in April from -2.1 percent in March, data from the Central Informatics Organisation showed, their lowest level since online records began in 2007.

Analysts said the deflation was linked to unrest in the Sunni-ruled island kingdom, inspired by popular protests that toppled the leaders of Egypt and Tunisia, that had hit economic activity and brought tourism to a virtual standstill.

"Longer-term, the subsidies they have announced will put some pressure on services prices. I wouldn't expect the risk of deflation to last anything but a very short period," Gabriel Sterne, senior economist at Exotix in London, said.

"In the short-term, demand in the economy did slump because of the unrest, but longer term, if supply is disrupted, it could go the other way."

The small non-OPEC oil producer declared martial law and invited troops from Gulf neighbours into the country to help quell the unrest in a crackdown on a protester camp near Manama's financial district on March 16.

On a monthly basis, consumer prices edged higher to 0.4 percent in April after a 3.5 percent plunge in March.

Housing costs, accounting for 23.5 percent of the basket, remained flat month-on-month in April, while food prices rose by 1.4 percent after a 1.2 percent increase in the previous month.

Transport prices, which make up 12.1 percent of the basket, decreased by 0.4 percent in April after a 3.2 percent fall in the previous month.

Separately, annual inflation in the UAE, the world's third largest oil exporter, edged down slightly to 1.1 percent in April after a 1.2 percent increase in the previous month, as housing costs, the largest consumer expense, fell.

The 0.1 percentage point dip in the rate was the fifth monthly decline in a row, data from the National Bureau of Statistics showed.

Consumer price growth in the UAE hovered close to 1 percent for most of 2010 as debt woes of Dubai state-owned companies depressed bank lending and the once-booming property sector remained weak.

"We expect some further downward pressure on rental prices going forward with additional supply, albeit at a weaker rate," Monica Malik, chief economist at EFG-Hermes in Dubai.

Housing prices, which make up nearly 40 of the basket, fell by 0.7 percent in April, after a 0.4 percent decrease in March.

Food costs, 14 percent of the basket, rose by 1.3 percent month-on-month in April after a 0.4 percent drop in March.

Malik said she did not see new credit growth as likely, even if interbank rates fall from levels above those of regional peers, as the central bank wants.

The central bank called in April for meetings with bank treasurers in the UAE to encourage them to set lower interbank rates to boost lending, which has been slow to pick up despite improved liquidity following Dubai's $25 billion debt restructuring deal last September.

The central bank also plans to introduce a repurchase facility for Islamic lenders in coming months.

"Bank liquidity has improved and needs to improve further for interest rates to come down," Simon Williams, chief economist for MENA at HSBC Bank in Dubai.

"I expect EIBOR to come down ... EIBOR is not being held at its current level because it's a reflection of the domestic credit environment and the strains that still are in the local economy and the local banking sector," he said.

The main UAE three-month interbank offered rate was set at 1.90 percent at Wednesday's fixing, the lowest level since January 2010.

Analysts polled by Reuters in March expected the UAE economy to expand by 3.4 percent this year, with annual inflation of 2.5 percent.

Worried by regional unrest, the UAE has said it will spend $1.6 billion to improve infrastructure in the less developed northern emirates, raised military pensions by 70 percent and introduced bread and rice subsidies.

Consumer prices in the emirate of Dubai increased by 1.2 percent year-on-year in April while in Abu Dhabi prices jumped by 2.0 percent, data this week showed.

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