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28 March 2024

Lower prices bring inflation respite to GCC

Published
By Staff

Inflation in Gulf hydrocarbon producers has remained somewhat subdued following a decline in global commodity prices and the rate is the lowest in the UAE and Qatar, according to a key Saudi bank.

Interest rates in the six-nation Gulf Cooperation Council (GCC) have also remained at one of their lowest levels and are unlikely to be raised before 2012, National Commercial Bank (NCB) said in a study.

NCB, the largest Saudi bank by assets, said the main monetary policy challenge facing the GCC economies in recent years has been the rise in global inflationary pressures against the backdrop of an extremely permissive monetary policy.

The study said it believes the fixed rate system in GCC nations gives them few opportunities to counteract such exogenous pressures.

Reflecting the general monetary dynamics, the regional inflation picture has been fairly diverse, it said, adding that Kuwait and Saudi Arabia are now the two regional economies with the most pronounced inflationary pressures.

By contrast, the UAE and Qatar still have very modest price pressures, in large part thanks to the absence of inflation in the area of housing due to the real estate corrections during the global crisis, NCB said.

It noted that for the UAE, Qatar, and Bahrain, housing inflation remains negative. In Bahrain, it is negative enough to bring the headline rate of inflation below zero. By contrast, Qatar has overcome its bout of deflation and prices are once again increasing, albeit at a very measured pace.

“In general terms, the region appears to be experience something of an inflation respite after the oil and quantitative easing-driven build-up of price pressures in some regional economies during the recovery from the crisis,” the study said.

“External price pressures have been alleviated somewhat by the corrections in global commodity prices….by contrast, additional pressures are likely to emanate from the increase in government spending virtually across the region. It is likely that regional central banks will resort mainly to open market operations and potentially reserve requirements should interventions become necessary.”

NCB said monetary policy constitutes an area of relative stability in the GCC, adding that the dollar peg to regional currencies has meant a policy backdrop of very loose interest rates, given the near-zero interest rate stance pursued by the US Fed and further amplified by the policy of quantitative easing.

“As a result, interest rates in the GCC are at a historically low level, something that has offered the regional economies welcome relief during the global crisis. GCC monetary policy is likely to remain very accommodative and we see no significant chance of an interest rate increase before 2012.”