Central banks in the Gulf region must implement tighter monetary policies, suggested a recent editorial in <i>Gulf News</i>. As high crude oil prices spur economic growth, government spending, as well as private sector investment, higher consumer price inflation and high asset prices may have ultimate negative social and macroeconomic repercussions, requiring such policies.
Several banks have already applied such policies as a result.
Though the gap with dollar interest rates has grown in addition to interest rates on domestic currencies, interest rates on the dollar, to which most regional currencies are pegged, easing the implementation of such policies on the part of regional monetary authorities.
Tighter monetary policy, therefore, is likely to continue in the coming months to ease inflationary pressures and counter balance the expansionary fiscal policy associated with higher expenditures and surplus budgets expected for the coming year.
Official inflation figures for the UAE stand at 5.2 percent, while domestic fuel prices rose by 32 percent, according to the report.
A number of informal indicators, however, suggest that the actual rate of inflation may be much higher than indicated by official figures.
Rents also rose in the UAE, by some 25 percent, accounting for around one third of the region's consumer price indices. In other parts of the region where the rental market is not yet fully liberalized, the increase was far less substantial.
Evidence also exists of second-tier effects of inflation in the region’s labor market: In the UAE, public sector pay increased by 25 percent for nationals and 15 per cent for expatriates.
Another reason for higher inflation rate is higher prices of imports from Europe, Japan and the UK, reflecting the weaker Gulf currencies and the dollar exchange rates against the euro, the sterling and the yen.