UAE should rethink dollar peg: StanChart

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The UAE should begin assessing alternative currency regimes before inflation gets out of control, Standard Chartered said yesterday.

Marios Maratheftis, bank's regional head of research, Middle East, North Africa and Pakistan, said the country should not wait until inflation reaches double digit again and begin putting pressure to the economy.

"It is much more important to be pro-active and tighten policy before situation gets out of hand," he said yesterday.

"They don't have to wait for the Fed to raise rates because they will have inflation long before the United States. It's much more important to be proactive. If we wait until inflation becomes double digit then policy won't be as effective."

Standard Chartered forecasts inflation will reach six per cent next year.

"Inflation expectation would be a bigger because if people expect inflation to rise while economy is booming, higher salaries will be demanded fuelling another inflationary-driven boom," Maratheftis said.

His comments echo Dubai ChamberDubai Chamber's recent warning that the UAE may once again see inflationary pressures by the turn of next year, adding that the low inflation environment is likely to be short-lived due to signs that the economy is starting to pick up. "Given the strength of the UAE economy which has until now withstood the force of the global downturn much better relative to the US, the UAE might need to adopt a higher monetary policy stance as inflationary pressures might start to appear as early as the turn of 2010," Dubai ChamberDubai Chamber said.

The fundamental concern for the UAE Central Bank will then be how they can respond if inflationary pressures resurface as it relied heavily on United States monetary policy.

"If this region recovers faster than the US does and US still has low interest rates then we could see inflationary pressures building up in 2010, which is something that we are anticipating," Maratheftis said.

Meanwhile, there is a consensus that the world economy is on its way to growth.

"To use this room as an analogy - two years ago the world's economy was on the ceiling now we're at the table, we're somehow off the floor but lower than peak," said Gerard Lyons, chief economist and group head of global research at Standard Chartered.

Abu Dhabi is slated to have five per cent growth and Dubai three per cent. This is slower growths but they are much more sustainable this time as it will no longer be input driven but productivity driven.

Growth is primarily driven by the stabilising oil price, which the bank forecast will average above $80 next year.

"This is excellent for the region, and even in Dubai whose revenues from oil related products is only two per cent. This will impact Dubai indirectly because high oil price would increase market sentiments and investors confidence," he said.

By Karen Remo-Listana

© Emirates Business 24/7 2009