UAE inflation to hit 12% as Fed cuts rates, says Merrill

Inflation (AFP)


Continuing interest rate cuts by the US Federal Reserve and their expected echo in UAE monetary policy will push the UAE inflation rate to 12 per cent this year from an estimated 10 per cent in 2007, analysts have said.

Another cut of 25 basis points in the Fed fund rate is expected to be announced after the April 29-30 meeting of the Federal Open Market Committee in Washington, investment bank Merrill Lynch’s global economics team said in a report released yesterday. Their projection is based on an expected decline in US economic growth for 2008 to a negative 0.7 per cent, compared to an earlier estimate of 0.9 per cent.

“We now see a 25bp Fed cut at end-month. We did some spring cleaning of our US GDP forecast, dusting off our assumptions about how well business sector spending is faring given the roiled financial markets and tighter credit conditions. The result was a 0.4 percentage point haircut to our H1-2008 GDP forecast… driven by a quicker downturn in non-residential investment spending and a sizable inventory correction in the auto sector,” Merrill’s analysts wrote in a weekly economic update. 

“We now see a 25bp cut at the April 29–30 FOMC meeting, as opposed to our earlier call of 50bp. While there is a risk that the Fed will pause in the near term, we continue to believe that the economy is going to be sufficiently weak and credit markets fragile enough to keep the Fed in rate-cutting mode. We still see a 1.0 per cent funds rate as the low, and we believe there will be a point in the coming year where that will look much less aggressive than it does today.”

The dirham’s peg to the US dollar ensures that the UAE Central Bank will echo the rate cut as it has done in the past. The US and UAE rates currently stand at 2.25 per cent, and they are expected to decrease to 2.00 per cent by April-end.

Merrill has revised its forecast for UAE GDP growth to 8.0 per cent last year, compared to 9.4 per cent in 2006. Growth will continue to soften in succeeding years – to 6.4 per cent this year and 6.1 per cent in 2009, the bank said. On the other hand, prices will grow by 12 per cent this year compared to 10 per cent in 2007 and 9.3 per cent in 2006.

It will ease to 8.0 per cent next year, the investment bank estimates.

 Global slowdown

 There are at least two problems with the view that the US slowdown just has not yet made its way to the rest of the world, but if you give it  time, it will, Merrill’s researchers said.

“First, it already has. Take a look, for example, at Asia’s trade statistics. Exports to the US slowed to a crawl in February, rising 1.4 per cent year-on-year against a 17.8 per cent increase the prior year.

“Yet, despite that, overall Asian exports surged by 19.2 per cent YoY, accelerating from their 10.6 per cent YoY growth rate the prior year. The US hit has happened, and the world has taken it in its stride,” the investment bank’s weekly economic update said. 

“Second, those countries that share the US features of high consumer debt levels, low savings rates and overdone housing markets (UK, Canada, Australia, New Zealand) have already shown signs of a slowdown.

“There is one fundamental problem with the view that the credit tightening is global: the data does not show it.

“Nine months into the US credit tightening, global money supply growth remains at 13.4 per cent YoY, with 52 per cent of countries experiencing slower credit growth than in September and 48 per cent experiencing faster growth,” the report said.