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Lack of monetary policy in GCC increases inflation
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A lack of monetary policy to control money supply and cool credit growth has pushed inflation further through the roof in the GCC, according to research by international financial bodies.
Citigroup's equity research shows greater currency flexibility and fiscal restraint would probably be the preferred policy options to quell the rates. It added the "region's political leaders now seem resigned to living with higher inflation".
Although rising inflation is a global phenomenon, it is particularly problematic in the Gulf. If sustained, higher inflation presents a challenge for many companies due to higher costs and uncertainty over future costs, Citigroup said. Over the longer term, more challenges are to be expected given that inflation, once established, can be difficult or painful to eradicate.
JP Morgan's recent economic research said with limited tools of monetary control and little appetite to tighten fiscal policy, the GCC governments are relying on less conventional steps to rein in inflationary pressures.
The UAE, for example, has announced caps on rents and cement prices and threatened fines on retailers that overcharge, but these measures are hard to enforce. Qatar has imposed price controls on food, but these could induce shortages.
And although subsidies on food, electricity and water are expensive and economically inefficient, they can be effective in holding down inflation in the short term, and given the large fiscal surplus, the governments are not overly concerned about the cost, according to the report by JP Morgan.
Citigroup's equity research shows greater currency flexibility and fiscal restraint would probably be the preferred policy options to quell the rates. It added the "region's political leaders now seem resigned to living with higher inflation".
Although rising inflation is a global phenomenon, it is particularly problematic in the Gulf. If sustained, higher inflation presents a challenge for many companies due to higher costs and uncertainty over future costs, Citigroup said. Over the longer term, more challenges are to be expected given that inflation, once established, can be difficult or painful to eradicate.
JP Morgan's recent economic research said with limited tools of monetary control and little appetite to tighten fiscal policy, the GCC governments are relying on less conventional steps to rein in inflationary pressures.
The UAE, for example, has announced caps on rents and cement prices and threatened fines on retailers that overcharge, but these measures are hard to enforce. Qatar has imposed price controls on food, but these could induce shortages.
And although subsidies on food, electricity and water are expensive and economically inefficient, they can be effective in holding down inflation in the short term, and given the large fiscal surplus, the governments are not overly concerned about the cost, according to the report by JP Morgan.