UAE could cut rates further

Dubai: The UAE Central Bank could cut interest rates further to match any cut by the US Federal Reserve, while playing down the impact of imported inflation due to the US dollar-pegged dirham's continued decline against major currencies.

Imports have become dearer in the UAE and the Gulf countries that peg their currencies to the US dollar, compounding the domestic inflation pressure.

Central Bank Governor Sultan Bin Nasser Al Suwaidi said issues like the high cost of renting real estate were bigger problems.

"The concern is due to domestic factors," he told reporters at a Ramadan Majlis.

He said 70 per cent of UAE imports were from Asia and the US and only 30 per cent from the euro zone countries and Britain, whose currencies are at record highs against the greenback.

However, Al Suwaidi sees the US dollar's weakness as temporary. "I do not think this situation is a permanent one," he said.

The Central Bank said it is committed to the dollar peg and will match any interest rate cuts by the US Federal Reserve.

"We will behave accordingly to maintain the parallel relationship with the US dollar," Al Suwaidi said.

Lower interest rates mean cheaper loans in the UAE, which is experiencing high liquidity in the market. Al Suwaidi agreed that "at this point in time there is high liquidity," but the bank has to look beyond the current market conditions.

"We always look ahead and put plans when a difficult situation develops," he said. UAE banks may have difficulty in securing funds abroad because of tight conditions in the global credit market due to the fallout from the US housing loans crisis, Al Suwaidi feared.

The UAE's currency reserves are between 95 per cent and 97 per cent in US dollars.

MONETARY UNION
2010 deadline unlikely to be met: Al Suwaidi

The UAE Central Bank governor said it is unlikely to achieve a GCC monetary union by an agreed 2010 deadline. Sultan Nasser Al Suwaidi said the full integration of the economies of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE will be a three-stage process.

"The first stage is aligning the currencies and we are midway in this process. In the second stage, we have done very well is clearing the channels of capital flows between our economies," he said, adding that the third stage of creating a common market was proving to be more difficult.

The problems are over issues such as land ownership by companies, opening of banks and investment in stocks. "Even labour laws are not uniform and it is not possible for GCC citizens to move freely from one economy to another and get jobs," he said. Al Suwaidi said "it will be useless to have a common currency" before a common market comes into being.

Have your say
Will this impact inflation? Is there a need for more definitive action? If yes, what would it be? Tell us at
letter2editor@gulfnews.com

Unless the peg to the US dollar is removed, we are headed for worser times. The common man is the most affected. And the signs of the dollar recovering is bleak.
Govind
Dubai,UAE
Posted: September 28, 2007, 08:39