GCC could revalue currencies in two months

Dubai: Gulf Arab nations may revalue their dollar-pegged currencies in the next two months to combat the inflationary affect of a weakening dollar, according to Standard Chartered.

The six Gulf Cooperation Council members, Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain and Oman are restricted in the fight against inflation because their dollar pegs force them to mimic US Federal Reserve monetary policy.

Rising import prices caused by the dollar's decline and increased revenue from higher oil prices has pushed inflation to a five- year high in the Gulf region.

"Within the next two months, the GCC will likely revalue," Marios Maratheftis, head of research for the Middle East at Standard Chartered, said yesterday.

"The question is whether or not they will drop the pegs - ultimately a political decision."

The Supreme Council of the GCC set out plans to study "inflation and soaring prices and their repercussions on citizens," according to WAM.

Sooner than later

The GCC will face pressure to revalue "sooner rather than later" amid expectations the Fed will cut interest rates further, said Standard Chartered. The Fed has cut the rate by 0.75 percentage points since September to 4.5 per cent. Policy makers make their next rate announcement on December 11.

"We view the de-pegging as the only option to avoid inflation accelerating further," BNP Paribas said in its FX Daily Strategist report to clients. If they do not, "the real effective exchange rate would adjust to higher levels via rising inflation."

The six nations appear divided on the direction of the dollar and are "still trying to work in unison," Monica Malik, an econ-omist at investment bank EFG-Hermes, said.

"There could be a small revaluation of three to five per cent" against the dollar should Gulf Arab nations coordinate currency policy, Malik said.

Saudi Arabia, Bahrain and Oman remain committed to the dollar peg, though the UAE and Qatar might move independently to a currency basket, Malik said.

There is more than a 50 per cent chance that UAE and or Qatar or all GCC members revalue in the first half of next year, EFG-Hermes said.

Policy split

A policy split between Saudi Arabia and the UAE was evident before the Doha meeting after the UAE Central Bank governor said it is reviewing the dirham's peg to the dollar, while Saudi Arabia said it wasn't considering a change.

The UAE's Foreign Minister has said the country will debate revaluing its currency against the dollar after the Doha summit.