Cutting US interest rates will only hurt the Gulf economies

Much has been said already about pegging Gulf currencies to the US dollar, particularly the UAE dirham. Many speculators have made and lost fortunes on the issue in recent months. Suffice to say that this week's interest rate decision in the US will re-open the debate, because there's a massive economic paradox: America desperately needs low interest rates to fight off recession, but the opposite is true here in the Emirates.

Going back to the argument about different types of inflation, today's soaring prices in Dubai, Abu Dhabi, Doha and beyond are predominantly "demand pull" inflation. The economies are booming, leading to an influx of people placing overwhelming demands on a limited supply of goods and services, principally real estate.

The cost of borrowing in the Gulf is less than five per cent, while inflation is more than 10 per cent, leading to negative real interest rates.

This adds fuel to the inflationary flames by encouraging people to borrow and spend – I've just taken out a cheap loan to pay my annual rent, something I wouldn't have done had interest rates been higher.

As long as the dirham is pegged to the US dollar, UAE interest rates will inevitably track US dollar rates. The relative merits of the peg certainly merit further discussion.