Rent hikes key reason for inflation

Abu Dhabi: Rising rents in Abu Dhabi are responsible for more than 50 per cent of the rate of inflation in the UAE, according to a Standard Chartered Bank official.

"Despite an expected slowdown in the rent hikes in Dubai, rents in Abu Dhabi are expected to further rise, while we find in other GCC countries, where rents did not record substantial increases, the real inflation rates are relatively low," said Steve Brice, regional head of research at SCB.

"We have also reduced the relative weight of housing in our basket for the UAE to 32 per cent, compared to the government's announced weight of 36.1 per cent, and that is due to the fact that many UAE nationals prefer to own houses rather than take rented accommodations."

SCB issued a report on Monday forecasting that the inflation rate in the country will be 13.8 per cent this year as a result of rising housing costs, high oil prices and imported inflation.

Interest spread

"Ideally speaking, the most suitable interest rate to be applied in the UAE should have a two per cent spread above the prevailing inflation rate. However, the country's hands are tied in this respect due to regional obligations related to GCC's economic integration.

However, in 2010, the date set for issuing the common currency, GCC member countries are advised to revise the peg with the dollar, and opt for a weighted basket of currencies, which is necessary if they need to address their respective inflationary pressures."

"Low interest rates prompt people to borrow extensively, resulting in abundant liquidity that would get invested in the stock markets or the property market," said Jeremy Parrish, SCB's chief executive officer for Abu Dhabi and Al Ain.

Demand pressure

"If we take Saudi Arabia as an example we find that there was negative inflation in 2002-03, while in the first five months of 2005 the inflation rate

was 0.4 per cent, and slightly above two per cent in the first five months of this year, an indication that the UAE's efforts to diversify the economy have necessitated the establishment of more labour-intensive industries, adding pressure to demand," he said.

"It is also thought that increasing personal credit, though not on record, can affect the inflationary pressure due to consumer spending. However, the ratio of consumer spending to GDP is relatively low in the UAE," he added.

Inflation so far has not been hurting business, with $19 billion worth of foreign direct investment pouring into the country last year. However, increasing rents, and the consequent increase in the cost of other services such as education, as well as wages, can result in a more costly business environment, though the government is currently working on the correction of the legal framework by introducing new laws, which can help to ease the pressure, said Monica Malik, senior economist at SCB.