Fed rate cuts could affect inflation and currency pegs in Gulf

Abu Dhabi: The US Federal Reserve plan to cut the federal funds target rate (FFR), according to which commercial banks lend each other, is expected to have a decisive effect on inflation as well as currency pegs in the GCC, according to economists.

The prevailing inflation rate in the US, which stands below four per cent, comes in contrast with some GCC countries, including the UAE which recorded more than seven per cent of inflation last year, according to official estimates.

"Central banks in the GCC tend to match the interest rates with the FFR. However, the Saudi Arabian Central Bank announced in June that in a case of a substantial cut of rates in the US, the financial authorities of the GCC countries will meet to discuss the issue, an indication that a departure from the peg can be expected," commented Dr. Giyas Gokkent, head of research at the National Bank of Abu Dhabi.

However, if the cuts were minimal, economists do not expect the GCC's central banks to follow, he said.

In theory, increasing the interest rate can represent an efficient instrument to curb inflation, and with the increasing prices in the UAE, many economists feel that what is needed can be a rate hike rather than cut.

Mounting pressure

During the past six months, pressure has been mounting on foodstuff prices, especially imports, including rice, powder-milk, wheat flour, bread, oil, sugar, and even water.

Consumers in the UAE, in general, and Dubai, in particular, have shown discontent on the situation since the past month.