UAE inflation in danger of hitting 12% this year
"Inflation in the UAE is in danger of hitting a 20-year high of 12% this year unless the dirham is revalued or depegged from the US dollar, investment bank Merrill Lynch warned on Sunday. The firm said in a report the absence of a tight monetary policy, combined with strong capital inflows and weak fiscal prudence would likely up drive inflation across the Gulf.
"Inflation is likely to stay on an increasing trend in the short term," the bank said. "With heated domestic demand, pegs to the sliding US dollar not only import inflation and fuel domestic liquidity but, more importantly, they also import easing monetary policy." Gulf states' peg to the dollar forces them to track US monetary policy at a time when the Federal Reserve is cutting interest rates to stimulate the economy.
Merrill said inflation in Saudi Arabia might average 6% this year, compared with 4% last year, while in Oman inflation may rise to 7.2%, from 4.4% last year, and in Bahrain to 4.5% from 3%. Despite breaking ranks with neighbouring Gulf states and depegging from the dollar in May last year, Merrill said Kuwait was also likely to see inflation surge in 2008/09 to an average of 6.6% from 4.4% last year due to rising house prices.
The bank said Qatar, which has the highest level of inflation in the Gulf at 14% last year, may see inflation drop slightly to 13% for 2008/09 due to housing supply coming on to the market. Merrill said inflation would continue to keep pressure on Gulf states to revalue or depeg their currencies from the tumbling dollar. "In a region with constrained policy choices, we expect currency strengthening to be used as a policy tool in the fight against inflation. Therefore, de-pegging and/or revaluation of the currencies will remain under spotlight," it said, highlighting the UAE and Qatar as the most likely to change their monetary policy.
"In a region with constrained policy choices, we expect currency strengthening to be used as a policy tool in the fight against inflation." The bank also disagreed with GCC governments' assessment that inflation was just temporary, and said non-market measures such as higher subsidies, allowances, "irrational" wage increases and caps on rents would only mask the problem and not solve it."
Its already past 12%. Latest estimate is foreign labour is suffering 15% inflation. Source - Financial Times:
http://www.ft.com/cms/s/0/23d469ba-c...0779fd2ac.html