UAE setting up agency to keep vigil on inflation

An agency is being set up to monitor rising inflation in the country, Central Bank Governor Sultan Bin Nasser Al Suwaidi said yesterday, reflecting growing concern about the high cost of living.

However, Al Suwaidi said tackling inflation is the responsibility of the Ministry of Economy.
However, the government is setting up a statistics agency to keep an eye on inflation, he said at a banking event at the Dubai International Financial Centre.

The 'Gulf News' daily quoted Central Bank Governor as saying there was no need at present to increase the level of reserves which banks are required to maintain, as has been done by Saudi Arabia and Qatar, to check the growth of money supply and thereby hope to stem inflation.
Economists at major Dubai-based banks have estimated that the rate of inflation in the UAE is close to 10 per cent or possibly higher.
"We do not see any need at the present time to raise reserve requirements," Al Suwaidi said, adding that there was either "very little" or no relationship between inflation and monetary expansion.

The weakened US dollar to which the UAE dirham and other Gulf currencies are pegged has also been blamed for worsening inflation in the region, where the cost of imports has risen as purchasing power of local currencies has dropped in tandem with the American currency.

Al Suwaidi has in the past described the dollar's troubles as temporary and said high rentals brought about by the housing shortage amid rapid economic growth and the rising population are more to blame for the high cost of living.

The dollar peg has also limited the UAE's options in controlling inflation as the Central Bank has followed the interest rate cuts of the US Federal Reserve, making borrowing cheaper.

"It is a huge topic of debate globally that there is no relationship between money supply and inflation. Personally, I think we cannot discount the impact of liquidity on inflation," said Marios Maratheftis, regional head of research at Standard Chartered Bank.

He said the creation of an agency to observe inflation would be a "positive development, and it shows the Central Bank is concerned about what is happening." On the monetary issue, Al Suwaidi appears to follow the view held by the US Federal Reserve. On the other hand, the European Central Bank believes that the link between money supply and inflation cannot be ignored.

Maratheftis said even though high liquidity does not translate into consumer inflation locally because product prices are mainly determined in Asia, it would nevertheless translate into asset price inflation which could lead to problems like the US housing market crisis. (WAM)