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Wed 6 Feb 2008 01:24 AM

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Kuwait central bank unhappy over inflation

Governor calls for more Islamic finance instruments to help control liquidity.

Kuwait's central bank is not happy that domestic inflation is historically high, although prices are not rising as fast as in other Gulf countries, Governor Sheikh Salem Abdul Aziz Al-Sabah said on Tuesday.

Speaking at a conference in London, Al-Sabah also called for a wider variety of Islamic finance instruments which would make it easier for monetary authorities to intervene in the market to control liquidity.

Kuwait's inflation, which hit all-time highs of 6.2% in September, has become a political issue because the country relies heavily on imported goods, a third of which are paid for in euros, while its main export, oil, is priced in dollars.

"Inflation is high historically. We are not satisfied... But compared with other countries in the region it's not so high," Al-Sabah told reporters.

In some of other Gulf Arab states, pricing are rising by more than 10%.

The region is struggling to control soaring inflation as higher oil prices spur rapid economic growth at a time when the US is cutting interest rates to prevent the economy from falling into recession.

Kuwait broke ranks with its Gulf Arab neighbours preparing for a monetary union in the next few years and dropped its peg to the US dollar in favour of a currency basket, giving more flexibility in setting interest rates.

The country cut its repurchase rate by 50 basis points on Thursday following a US. Federal Reserve interest rate cut but kept its benchmark rates unchanged.

In December, Kuwait's government unveiled a package of anti-inflation measures such as intensifying price controls in supermarkets.

Al-Sabah said creating more Islamic finance instruments were necessary as they would help monetary authorities in controlling liquidity.

"We need to develop ... more instruments to provide more investment opportunity for the public ... and in order for central banks to use such kind of instruments to intervene in the market for the sake of regulating liquidity," he said.

"(There is a) need of having sovereign sukuk, those which provide sufficient cushion for monetary authorities to play a role in market operations in the Islamic banking."

Sukuk is an Islamic bond backed by physical assets from which returns are paid to bond holders rather than interest. (Reuters)

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