Kuwait: inflation requires caution

Sheikh Salem Abdul-Aziz Al Sabah said in remarks published on Monday that rising inflation in the Middle East's fourth-largest oil-exporter "requires caution" but the link between discount rate moves and price levels had proven weak.

"The rise that inflation rates have witnessed in Kuwait in the recent period requires caution and taking the necessary policy and measures maintain relative stability in the general level of local prices," he told al-Rai newspaper.

"Studies carried out by the central bank reveal that the link between the central bank's increases in the discount rate and increases in average inflation is weak."

Gulf Arab states are struggling to control soaring inflation as higher oil prices spur rapid economic growth, at a time when the United States is cutting interest rates to stimulate its economy amid fears of a looming recession.

The Kuwaiti comments come a day after Oman's central bank governor said his country would sell more certificates of deposit and may again raise the portion of deposits banks cannot lend in an effort to control inflation that is still likely to accelerate this year.

Kuwait broke ranks with other Gulf Arab states and severed its currency's peg with the US dollar last year, giving it more flexibility in setting interest rates.

It said in January it was studying options to curb inflation, which hit 6.2 per cent in September, the fastest rate of price rises on record amid accelerating credit growth.

In an effort to slow lending growth, Kuwait kept the benchmark discount rate unchanged since July 2006, but finally cut it on January 23, saying the gap between dinar yields and interest rates on deposits in other currencies, including the dollar, had grown too wide.

Inflation has become a political issue in Kuwait because the desert Gulf Arab state pays for a third of its imports in euros.