Business | Economy
Hopes light up for revaluation
The Gulf central banks' collective decision to pursue independent monetary policies to quell the surging inflation has re-ignited hopes of revaluation of some of the region's currencies, especially the UAE dirham and Qatari riyal.
- By Babu Das Augustine, Banking Editor
- Published: 00:16 September 10, 2007
Dubai: The Gulf central banks' collective decision to pursue independent monetary policies to quell the surging inflation has re-ignited hopes of revaluation of some of the region's currencies, especially the UAE dirham and Qatari riyal.
Governors of the GCC central banks, who met in Saudi Arabia on Saturday, said the 2010 currency union target is difficult while allowing the GCC member states devise individual strategies to deal with domestic inflation.
Although central bank governors of Saudi Arabia and Oman clarified later that independent monetary policy measures would involve only interest rate adjustments, analysts said yesterday that some GCC governments would opt for something more concrete than interest rate adjustments such as revaluation or even depegging to deal with inflation.
"Initially, the independent monetary policy is likely to mean largely interest rate adjustments. However, the move has increased the expectations on a possible revaluation of currencies or a move to a more flexible currency regime," said Monica Malik, an economist with EFG-Hermes, a regional investment bank.
In the context of the US Open Market Committee's concerns over a slow down, a rate cut in the US is widely anticipated on September 18. UAE central bank governor Sultan Bin Nasser Al Suwaidi declined to comment when asked whether he was considering changing the reference rate of the dirham.
"A US rate cut leaves the UAE and Qatar with limited choices: They can continue to follow US monetary policy, lower interest rates and risk an uncontrollable inflationary trend; or they can follow Kuwait's footsteps and free their currencies from the dollar," said Reem Mansour, an analyst with Cairo-based HC Securities.
A common target of achieving the monetary union by 2010 has been the prime motive for having a monetary policy convergence in the region. "A decision to have independent inflation policy would mean lack of uniformity in monetary policies of GCC states, which would make it difficult for the region to achieve currency union any time soon," said Malik.
Related Links
Prices: Housing woes and dollar spur inflation
According to the Ministry of Economy, the UAE inflation was at 9.3 per cent last year. Recent official data showed inflation hitting 3.83 per cent in Saudi Arabia in July and 12.8 per cent in Qatar.
While the housing shortage and supply constraints in a massively expanding economy have contributed to the inflation, the persistent fall of the dollar has also been a factor in pushing up imported inflation in the UAE. The dirham fell 15.4 per cent against the euro from December 2005 to end of August 2007, and a 16.9 per cent against the sterling.
Are you worried by the impact surging inflation will have on your long-term saving plans? What precautionary measures have you taken? Do you expect to hear about the revaluation of the dirham very soon?
Your comments
Time to dump the dollar and make the dirham stronger, if any body has any sense. It will stop the imported inflation at least.
Sangha
Glasgow,Scotland
Posted: September 10, 2007, 04:43
More from Economy
More from Business
Business Editor's choice
-
DFSA chief to step down in September
Executive has been at post since 2008
-
Geepas idea blossomed in Dubai
The journey led from a small shop in Bahrain to a $1.27b company in the UAE
