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Review currency peg GCC urged.

DUBAI: Gulf states should consider dropping their pegs to the weak US dollar to have more tools to control inflation and achieve single currency criteria, Dubai International Financial Centre (DIFC) economists said.

Targeting inflation should be the top priority of the Gulf central bank to be set up by Saudi Arabia, the UAE and three other states as they roll out a single currency, the DIFC said in a report yesterday.

"Pegging to the US dollar is not the best policy to control inflation," said DIFC chief economist Nasser Al Saidi.

"The central policy issue is to gear monetary policy toward controlling inflation. A Gulf monetary authority should put its priority to Targeting inflation."

Dollar pegs have forced Gulf central banks to track seven US interest rate cuts in the past year, driving real interest rates into negative territory and stoking inflation to records.

Gulf states agreed in 2001 on European Union-style convergence criteria towards achieving a single currency by 2010, including an inflation target of no more than two per cent above the regional average.

Last year, the weighted average Gulf inflation rate was 6.9pc, a level exceeded by the UAE and Qatar, the DIFC said.

While inflation has converged this year, and will probably average 9pc in five of the six Gulf states according to a poll, it will be difficult to keep them in sync without more monetary flexibility, Al Saidi said.

"They need to have independent monetary tools to intervene in the money markets, buy and sell treasury bills to affect interest rates, and target inflation and be accountable for those targets," he said.

The DIFC is the latest body to urge Gulf states to reconsider currency policy as they prepare for a 2010 deadline that policymakers have conceded is very difficult to meet.

The Abu Dhabi Department of Planning and Economy called on Gulf states to consider a currency basket in a report last month, shortly before the Saudi shura advisory body said it was studying a proposal to revalue the riyal.

The International Monetary Fund said Gulf states should consider alternative exchange rate regimes if the monetary union is delayed.

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Publication:Gulf Daily News (Manama, Bahrain)
Date:Aug 20, 2008
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