UAE inflation on upward trend

Although monthly figures are not released by the UAE Central Bank, the latest quarterly figures covering the third quarter of 2007 point to a 30% growth in M2 (the domestic money supply).

The National Bank of Abu Dhabi (NBAD) said the Central Bank's balance sheet has 'ballooned', another indicator of high inflation.

In 2006 the inflation figure was officially 9.6%, but it was generally considered to be higher, pushed up by the big rent increases many landlords forced through. Officially, rent rises hit 15.4%, although real estate companies believe the figure to be far higher. The percentage rise in rents was expected to be slower in 2007, but NBAD said it is more likely to grow, hitting 18-19%.

The price of food also rose through 2007 by around 8%, but this has a smaller affect on inflation. The Bank estimates that headline inflation will be around 10.9% in 2007, and that rent accounts for 61.8% of that figure. 'Inflation continued to be driven by a non-exchange rate related factor and therefore a re-evaluation may not be warranted from policymakers' perspective,' said NBAD.

Dirham revaluation

Even so, a revalutation of the dirham, which has been looking more likely over the recent weeks, would temper inflation, and the Bank says such action should not be ruled out.

The Bank said the figures raised questions over the effectiveness of rent caps that are now in place in the region, although it accepted that on an individual level, tenants had benefited from the policy.

It said the most likely approach to coping with inflation now was to 'muddle through'. It would give policymakers the time to gauge the effect of new housing stock on prices - although with so little due online in the immediate future it is difficult to see how this will have much of an impact.

NBAD accepted that inflation will continue its upward trend in part because of 'backwards looking expectations', but said going forward the dollar peg policies will result in GCC rate cuts.

But overall, GCC inflation is not caused by internal or external deficits and that there is 'some merit to the argument that it is temporary', it argued. It added: 'So long as the US dollar maintains current levels, or even strengthens versus the euro, then the muddle though policy could be maintained.'

See also:
Gulf States close in on currency revaluation
Stronger US dollar makes GCC revaluation safer
Booming Arab construction market brings opportunities, challenges