By Martin Dokoupil
Basket peg serves economy well, provides room to manoeuvre - cenbank head.
Kuwait's central bank will keep pegging its dinar to a currency basket for the foreseeable future, and prefers not to rush plans for a Gulf single currency, Governor Sheikh Salem Abdul-Aziz al-Sabah said on Thursday.
Kuwait is the only Gulf Arab country tracking a currency basket after it broke ranks with fellow dollar-pegging oil producers in 2007 to keep surging inflation in check. It plans to form a currency union with Saudi Arabia, Qatar and Bahrain.
"The present exchange rate arrangement is serving the Kuwaiti economy well and there is no reason for, or net benefit of, changing it," Sheikh Salem said in an e-mail response to Reuters' questions.
Sheikh Salem also said the basket peg provided relatively more room to manoeuvre in designing and conducting monetary policy and helped to insulate the Kuwaiti economy from external inflationary pressures linked to exchange rate fluctuations.
He declined to reveal the composition of the basket, only saying it consisted of currencies of Kuwait's major trade and financial partners.
The central bank said in the past the dollar was the biggest component of the basket, while analysts have estimated the greenback's weight at around 75 percent.
The monetary authority set the dinar reference rate at 0.28880/90 to the dollar on Thursday, just a shy of the rate in May 2007 when it dropped its dollar link.
Late last year, the dollar's weakness fuelled a debate among Gulf countries on whether linking their future common currency to the greenback was the best option due to inflation fears.
Sheikh Salem did not say what currency regime would best fit the planned union, designed to emulate the euro zone, adding it was not possible to set a date for the single currency launch.
"While it is neither possible nor advisable at this stage to mention an exact date, we do look forward to increased efforts towards preparing the groundwork so that the single currency can materialise," he said.
"It is vital that we do it right, rather than doing it quick," he added.
Saudi central bank governor and newly named head of the joint Gulf monetary council Muhammad al-Jasser said last week a deadline for the launch of the single currency would not be set. The countries abandoned an initial 2010 deadline last year.
Gulf states, which invest a large chunk of their foreign exchange reserves in U.S. assets, have no flexible monetary policy tool to control inflation, which climbed to record, double-digit peaks in 2008.
Kuwait's central bank surprised the markets in February, cutting its key interest rates by 25 to 50 basis points to support growth, expecting inflation to stay low.
Sheikh Salem did not say whether he saw room to reduce interest rates further, only saying that fiscal policy must help spur economic growth.
"It must be noted here that for monetary policy to be more effective, it must be supported by complementary fiscal and economic reform policies to further stimulate economic activities and expand production capabilities," he said.
The central bank expects Kuwait's economy to expand by 4 to 5 percent this year, following an estimated contraction of 1.5 to 2 percent in 2009, while inflation is likely to accelerate.
"Recently, the International Monetary Fund projected a CPI inflation in Kuwait of 4.8 percent in 2010. That projection appears to be quite reasonable," Sheikh Salem said.
Annual consumer price growth picked up again in December to reach 2.1 percent, central bank data showed on Thursday, after slowing to a three-year low of 1.6 percent in November.
Kuwait's inflation reached 4.0 percent last year, down from a peak of 10.6 percent in 2008. Analysts polled by Reuters expected consumer prices to rise by 4.3 percent this year. (Reuters)