Bahrain to check money supply

Bahrain may raise the reserve requirement for commercial banks to slow inflation if money supply growth keeps accelerating, central bank Governor Rasheed Al Maraj said.

"It is possible, if we continue with the same trends in money supply, we might look at it again," Al Maraj said yesterday in an interview in Sharm El Sheikh, Egypt. The central bank raised the reserve requirement to seven per cent from five per cent in January.

Gulf states are struggling to control quickening inflation as an oil-fuelled economic boom leads to shortages of housing and soaring bank lending. Saudi Arabia and Qatar raised bank reserve requirements this year after lowering interest rates in line with the US Federal Reserve to maintain their currencies' dollar pegs.

Bahraini inflation accelerated to just below five per cent, Al Maraj said, after averaging around one per cent for the past decade. M3 money supply growth accelerated to 39 per cent in March. Saudi inflation reached 9.6 per cent in March, while consumer prices in Qatar increased 13.7 per cent in the fourth quarter.

Bahrain should cut government spending to help slow inflation, Al Maraj said yesterday. "We would like to see a moderation in public spending," he said. "This is part of the elements that are causing liquidity, which in turn leads to the extension of more credit, and then probably creating some inflationary pressure."

Al Maraj said the 2010 deadline for a proposed Gulf single currency is "not sacred" as long as the process remains on track.

"I know everyone is focusing on 2010, but the key thing is to get the elements of the process right, because there is no U- turn," he said.

"The legal framework is important, the institutional set up, the responsibilities of this new organisation," Al Maraj said. Decision-making within the institution that will control monetary policy in the Gulf following the creation of the single currency "is being worked out" he said. The Gulf states meet all the five convergence criteria except for inflation, which stipulates consumer price growth must be within two percentage points of the average of the six GCC states.

The other criteria refer to budget deficits, interest rates, foreign reserves, and the ratio of public debt to gross domestic product.

Bahrain is committed to keeping the dinar pegged to the dollar in the run up to the planned launch of a Gulf single currency in 2010, Al Maraj said yesterday.

The dollar peg "has some impact, but not a major impact", Maraj said. "The major impact comes from domestic issues", such as housing shortages, he said.