The US Federal Reserve’s decision to cut interest rates will further boost calls for a revaluation of the UAE dirham, according to local economists.
Lower US interest rates will weaken the dollar, to which the dirham is pegged, and prompt further calls for the UAE to revaluate, or to de-peg from the depreciating greenback.
“The argument for a revaluation and dropping the peg increases,” says Mary Nicola, Economist at Standard Chartered in Dubai.
“That’s because they’d have to cut rates here [in the UAE] too, which would drive investment and increase liquidity, which is a driver of inflation.”
The UAE’s rising cost of living has been one of the key arguments of those calling for a revaluation of the dirham. Inflation rose to a 19-year high of 9.3% last year.
Tuesday’s decision by Fed chairman Ben Bernanke (pictured above) and his colleagues was to cut interest rates by 25 basis points to 4.25 per cent. The move is likely to be followed by the GCC countries, which rely on imported monetary policy.
“Usually the UAE has followed pretty quickly in cutting rates, usually within a few days,’ said Mary Nicola.
The move by the Fed came on the same day that the UAE’s central bank governor denied a report he may quit over pressure to drop the dollar pegging.
“This story is totally incorrect, baseless and without any merit whatsoever,” Sultan Nasser Al-Suwaidi told state news agency WAM on Tuesday, responding to a report earlier that day that he could step down as early as December 18th.