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Gulf's dollar peg to fuel inflation says top bank.

DUBAI: Gulf inflation could accelerate to fresh highs this year as the oil producers with dollar pegs cut interest rates fuelling borrowing.

Inflation in Saudi Arabia may average six per cent this year, compared with 4pc last year, US investment bank Merrill Lynch said in a report.

Price rises in the UAE - the second-largest Arab economy - may climb to a 20-year high of 12pc this year, compared with 10pc last year, Merrill said.

"Inflation is likely to stay on an increasing trend in the short term," the bank said.

"With heated domestic demand, pegs to the sliding US dollar not only import inflation and fuel domestic liquidity but, more importantly, they also import easing monetary policy."

The pegs, to which Kuwait is the only exception, force the oil producers to track US monetary policy at a time when the Federal Reserve is cutting interest rates to stimulate the economy.

In contrast, Gulf economies are surging on oil prices that have more than quadrupled in the last six years, spurring inflation.

"In a region with constrained policy choices, we expect currency strengthening to be used as a policy tool in the fight against inflation," Merrill said.

The Fed has slashed 175 basis points off its benchmark since September 18, cuts the Gulf states have mirrored.

In Qatar, where prices are rising the fastest, inflation could accelerate to 14.5pc this year from 14pc last year, Merrill said.

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Publication:Gulf Daily News (Manama, Bahrain)
Date:May 1, 2008
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