Rise in money supply to fuel UAE inflation this year - Emirates24|7

Rise in money supply to fuel UAE inflation this year

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The rate of money supply growth in the UAE will accelerate further this year, fuelling inflationary pressures and pushing up consumer prices, senior bankers told Emirates Business on Tuesday.
 
The bankers fear the surge in liquidity will put more pressure on infrastructure and increase demand for commodities and property.
 
“The pace of monetary growth is alarming but not surprising given the continued growth in public spending and sharply negative real interest rates,” said Simon Williams, chief economist for Gulf markets at HSBC Bank Middle East.


The UAE Central Bank’s report on banking indicators for 2007, which showed high money supply growth in the country, raised concerns about high inflation rates, increasing liquidity and higher prices of assets and commodities.

The bank’s money supply growth figures for the end of last year showed that M1 increased to Dh181.7 billion, 51 per cent higher than in 2006, M2 surged to Dh565.7bn, a 41.7 per cent increase, and M3, including large time deposits, institutional money-market funds, short-term repurchase agreements, and large liquid assets, grew to Dh692.5bn, a 36.7 per cent increase.

The indicators showed rapid increases in banks’ lending facilities, which reached Dh722bn, a 40 per cent increase compared to 2006. “There is no incentive to save and every reason to borrow and spend.
 
The money supply numbers in the UAE for the first quarter of 2008 may well be even higher as the monetary aggregates show the impact of further interest rate cuts.
 
“In this kind of environment consumer prices are likely to rise. Asset prices are also likely to strengthen as those with surpluses look to real estate and the equity markets as more effective stores of value than bank savings, which will actually lose money in real terms.”

Fadi Al Saeed, head of investment funds at the National Bank of Dubai, said the increasing money supply would double the arbitrage of assets, particularly in the real estate sector.


“This will create artificial demand for real estate as investors purchase more property, not because of their real needs but as hedging for their capital because of the depleting dollar value and, accordingly, lower dirham value, along with increasing inflation.

“Consumer prices will increase because the current rapid economic growth rate in the UAE creates high pressure on the infrastructure and the supply of goods and commodities. We need conservative monetary policy to control interest rates and liquidity in the markets, but the peg with the dollar prevents the introduction of such conservative measures.”

Al Saeed said increasing interest rates on personnel consumption loans could be a short-term solution to the problem of increasing borrowing. “However banks working in the country have high capital and liquidity,” he said. “They want to increase their lending abilities to manage this liquidity and increasing interest rates on personnel consumption loans would reduce their lending abilities.”

A Standard Chartered Bank spokesman said the growth of the money supply was natural because the UAE economy was booming and the population growing.

“However the figures are excessive and alarming,” he said. “The UAE has faced double-digit inflation rates in the past two years. And with no real way to absorb the liquidity money supply is high in the economy and abetting record high inflation rates.

“Rapid money supply growth has severe implications for current and future inflation. There is plenty of money circulating in the economy and this will not only affect goods price inflation but also asset prices.

“Even though the economy is increasing in size there is essentially too much money chasing too few goods. These numbers support the case for a revaluation as it would absorb some of the excess liquidity by encouraging nationals to switch their dirham holdings into dollars.”

The spokesman said inflation was a monetary phenomenon and the Central Bank’s figures explained to a great extent the inflationary pressures the UAE was facing. “This monetary phenomenon needs to be addressed by monetary policy and for this to happen we need to see changes in the currency peg.”

 

 

Money Supply Increases In Bahrain

 

Annual money supply growth in Bahrain, an indicator of future inflation, accelerated to 36.3 per cent in January as investments in time and savings deposits jumped, central bank data showed yesterday.

 

M3, the broadest measure of money circulating in the Bahraini economy, rose to 6.69 billion dinars (Dh65bn) at the end of January, compared to KWD4.91bn a year earlier, the central bank said.

 

Money supply grew 34.8 per cent in December after accelerating at its fastest pace in at least six years in each of the five previous months.

 

The central bank’s net foreign assets jumped 81.5 per cent to KWD1.63bn in January, the data showed.


Money supply growth, driven by oil prices that have risen fivefold since 2002, is fuelling inflation across the world’s top oil-exporting region.

 

Like most of its neighbours, Bahrain pegs its currency to the dollar, forcing it to track US interest rate cuts and constraining its fight against inflation.Bahraini consumer prices fell 0.3 per cent in February from January as the cost of clothing and footwear declined.


Kuwait’s consumer price index fell to 104.36 in February from 104.64 in January, the government’s Central Informatics Organisation said on its website yesterday. The cost of clothing and footwear fell 9.2 per cent in the period. (Agencies)


 

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