Currency peg and oil prices add to inflation
Last Updated: May 03. 2008 5:19PM
Sultan Bin Saeed Al Mansouri, Minister of Economy. Jeffrey E. Biteng / The National
DUBAI // Currency pegs, as well as high oil and food prices, are compounding inflation, said Sultan bin Saeed al-Mansouri, Minister of Economy, on Friday.
The UAE was the first dollar-pegged Gulf state to match Thursday’s US interest rate cut, the seventh since September.
“This phenomenon is an expected product of our region’s economic boom, but is being compounded further by other factors such as globally rising food commodity prices, currency pegs, and excessive oil rates,” said Mr al Mansouri at a conference in Beirut.
“Monetary and exchange rate tools and fiscal options have to be considered with greater caution as they could trigger economic distortions,” he added.
Last month Mr Mansouri said it would be a “miracle” if the UAE meets its five per cent inflation target this year.
The second-largest Arab economy has tried to curb inflation by signing agreements with supermarket chains to fix food prices at 2007 levels. Gulf oil producers have also introduced rent caps, public sector pay rises and food subsidies.
UAE inflation hit a 19-year peak of 9.3 per cent in 2006 and probably accelerated to 10.9 per cent last year, according to an estimate by the National Bank of Abu Dhabi.
“Some countries have opted to turn to a basket of currencies ... Still others are weighing the effects of a currency revaluation,” Mr Mansouri added.
“While there is no single cure for the inflation problem as each nation has its own unique economic structure, the only certain actions we must take are to vigilantly monitor regional and global financial trends and act accordingly,” he added.
- Reuters
Fixing rents, prices and subsidies has never worked and never will. In a year's time they will be blaming the same old culprits but doing nothing about it. They were this time last year weren't they? That led to premature speculation on de-pegging the dirham.
Trouble is they cannot de-peg or revalue - Uncle Sam wont let them because the trillions that the Middle East would then flood onto the market would collapse the USA into a depression and it would not be unable to fund the shield in the Middle East that many Gulf states rely on.
Likewise the very wealthy with their dollar reserves would have them devalued overnight. Who's going to allow that?
So inflation will continue to soar as will rents and food and everything else while the media makes more soothing noises promising the problem will be addressed. It won't.
The public will pick up the tab for bad financial policy imported from the USA. That means less in your pocket every day.