UAE says currency pegs, oil prices add to inflation

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The UAE was the first dollar-pegged Gulf state to match a seventh US interest rate cut since September on Thursday. Dollar pegs in all Gulf oil producers but Kuwait compel them to track the Federal Reserve though inflation is spiralling and their economies are booming.

“This phenomenon [inflation] 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,” Sultan bin Saeed al-Mansouri said at a conference in Beirut, according to a ministry statement.

“Monetary and exchange rate tools and fiscal options have to be considered with greater caution as they could trigger economic distortions,” he added.

Mansouri said last month it would be a “miracle” if the UAE meets its 5 percent inflation target this year.

The second-largest Arab economy has tried to curb inflation partly 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 percent in 2006 and probably accelerated to 10.9 percent 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,” Mansouri said.

“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.

 

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