“It’s not a compelling issue to drop the peg,” he said.
Gulf Arab inflation could accelerate to fresh highs this year as the oil producers with pegs to the dollar cut interest rates in line with the United States, fueling borrowing, Merrill Lynch & Co said in a report received on Sunday.
Any revaluation might undermine investor confidence in the region, Nasr said.
“If you look at the UAE and Qatar, the best analogy is Hong Kong,” Nasr said. “They have developed a series of tools over the years to deal with fact that you lose monetary independence when you have the peg. They have been very creative
However, Gulf Arab inflation could accelerate to fresh highs this year as the oil producers with pegs to the dollar cut interest rates in line with the United States, fueling borrowing, Merrill Lynch & Co said.
Inflation in Saudi Arabia, the most populous of the six Gulf nations, may average 6 percent this year, compared with 4 percent last year, the US investment bank said in a report.
Price rises in the United Arab Emirates — the second-largest Arab economy — may climb to a 20-year high of 12 percent in 2008, compared with 10 percent last year, Merrill said.
“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.”
The pegs, to which Kuwait is the only exception, force the oil producers to track US monetary policy at a time when the Federal Reserve is cutting interest rates to stimulate the economy.
In contrast, Gulf Arab economies are surging on oil prices that have more than quadrupled in the last six years, spurring inflation.
“In a region with constrained policy choices, we expect currency strengthening to be used as a policy tool in the fight against inflation,” Merrill said.
The Fed has slashed 175 basis points off its benchmark since Sept. 18, cuts the Gulf states have mirrored.
In Qatar, where prices are rising the fastest, inflation could accelerate to 14.5 percent this year from 14 percent in 2007, Merrill said.
