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Dubai: Inflationary pressures in the GCC will continue to build, driven by the region's unsuitable monetary policies, said economists for Standard Chartered Bank.
Whereas the markets generally expect the US Federal Reserve to raise interest rates next time round, in fact a cut to one per cent can be expected early in 2009.
It is only the 'end of the beginning' of the global credit crunch, the Bank suggests.
Group chief economist Dr Gerard Lyons said the economic boom in the Gulf was being motored by the dollar peg. There is a need to drain financial liquidity, whether by developing capital markets, or fiscal policy, or bank reserve requirements.
Stance
Regional head of research Marios Maratheftis described the current policy stance as "ultra-loose", with signs of speculative excess in the housing market, and the potential for a boom-bust cycle, taking the edge off the UAE's 'business model', even with good underlying fundamentals.
Without policy change, cost pressures and supply bottlenecks will only worsen. With inflation a growing concern for businesses, currency revaluation would be "recommended", said Maratheftis.
Solutions
Eventually, the authorities would have to "bite the bullet" when this situation reached tipping-point. Waiting for the GCC's proposed monetary union in 2010 would be "too late", he said, as the impact of policy adjustment would then be delayed anyway.
As for the impact on the US dollar of Gulf currency revaluations, Maratheftis suggested that it might even be helpful overall, since the dollar had overshot on the downside against the euro because of the lack of adjustment against the Asian currencies, where the key global imbalances reside.
What is really needed is higher interest rates, which moving to a currency basket would hardly address, Lyons admitted. But the option to float the region's currencies to get round that issue might take ten to twenty years.
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