UAE inflation to remain low for years

state sector following the 2008 global fiscal crisis, according to local and foreign officials.

After rocketing to a record high of 12.3 per cent in 2008, the rate plunged to just around 1.5 per cent in 2009 and is expected edge up slightly to nearly 2.2 per cent this year and remain controllable in the following years, they said.

Although there are no plans to end the peg between the UAE dirham and the fluctuating US dollar, the post-crisis slowdown in the property sector and the slump in rents will ensure the inflation rate will remain low.

“There are now some mechanisms that will ensure that high inflation will not come to the UAE for many years,” UAE central bank governor Sultan bin Nassir Al Suwaidi said at a press conference this week.

“Property prices and rents in the country had been the main cause for the sharp rise in inflation over the past few years…the UAE is now more capable to monitor inflation and control its level in the coming period.”

Recent data by the International Monetary Fund (IMF) showed the real estate slump and lower commodity prices depressed inflation in 2009 to its lowest level in nine years and the rate is expected to remain subdued in the next five years.

Inflation is projected at 2.2 per cent this year and three per cent in 2011, far below the rate recorded at the height of oil boom in 2008, the IMF said.

It expected inflation to climb to around 3.2 per cent in 2015 but it also remains way below the rate recorded during 2004-2008, when it soared to between five and 13 per cent, its highest level since the UAE was founded in 1971.

“Inflation in the UAE is still limited and within acceptable levels that can be easily controlled,” said Masoud Ahmed, Director of the IMF’s Middle East Department.

“This inflation is linked to several factors, including the decline in the exchange rate of the dollar and the peg of the UAE dirham to the US currency,” he told the London-based Saudi Arabic language daily Alsharqalawsat this week.

A surge in rents, global food prices and the value of imports from the UAE’s major economic partners because of the weakening US dollar boosted the country’s inflation to its highest rate in 2008 and prompted the central bank to match US moves and hike rates to curb lending.

It tumbled to 1.5 per cent in 2009 as a result of a steep decline in the real estate sector in most emirates, a fall in global food prices after the fiscal crisis and a strengthening in the US dollar, to which the UAE dirham is pegged.

The housing sector accounts for nearly 40 per cent of the UAE’s consumer price index (CPI) and this explains its strong influence on inflation in the country.

Housing services swelled by around 4.87 per cent in 2008 but growth plunged to only about 0.42 per cent in 2009 because of a large decline in rents and property prices in Dubai and other emirates following the global crisis in September 2008.

In the first half of this year, inflation in the UAE stood at around 0.43 per cent as the rate remained subdued by lower rents and weak domestic demand.

The rate was also as low as 0.95 per cent last June compared with June 2009 and the rise was mainly due to an increase in the prices of food, liquor, home appliances as well as education and culture services.

The figures by the National Bureau of Statistics (NBS) of the Ministry of Economy showed inflation stood at only around 0.11 per cent in June compared with the previous month, one of its lowest levels in many years.

NBS said the plunge in the inflation rate last year was a result of a slowdown in the economy, slower consumer domestic demand, a sharp decline in food prices and lower individual and corporate spending.

“The gradual economic recovery in 2010, especially in the real estate sector, is expected to slightly increase the rate of inflation between one and 1.5 per cent by the end of 2010, and between two and 2.5 per cent in 2011,” it said.

 “This shows inflation is no longer a major threat and the authorities have succeeded in reducing the rate of inflation.”

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