Less than a month after the UAE central bank, based in oil-rich Abu Dhabi, the capital, subscribed up to half of a $20bn five year bond program launched by the Dubai government–news that caused the Dubai Financial Market index to jump 5%–Standard Chartered predicted that inflation levels will fall to 2-3% this year in the UAE as rents and commodity prices ease, and as liquidity dries up.  The new projection is considerably lower than the 20% calculated in 2008.  In fact, inflation accelerated to record highs in all six Gulf Cooperation Council (GCC) states during the past year, fueled by higher government spending and a falling dollar, to which most of the regions currencies are linked.

Yet the bank’s inflation projection is in contrast with that of the government.  UAE Minister of Economy Sultan bin Saeed Al Mansouri, for example, estimates inflation for the year in the range of 5-8%, adding that the government plans to cap prices on 16 basic items and offer discounts at state-owned supermarkets.  However, he lamented, “it is very difficult to have an inflation target when you have a dollar peg.  Policy makers don’t have the tools – the ability to use the currency and the interest rate – to achieve this target because interest rates are set by the U.S. Federal Reserve.”  That said, Mansouri expects inflation to fall because “the supply side will continue but prices will come down especially in the real estate sector due to the drop in demand.”

Finally, Standard Chartered also warned that the country needs a significant increase in liquidity.  The bank believes there is a Dhs110bn liquidity shortfall, despite the recent measures to inject money into the system.  Measures like an additional liquidity injection and a permanent repo window would help plug it, according to Shayne Nelson, the bank’s Regional CEO of the Middle East and North Africa.

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