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Inflation will halve in 2007, says Al Suwaidi

“Inflation will decline from the current level of 8 per cent to about 4 per cent in 2007. Rent is the major source of inflation in the country. There are clear signs that rents will come down in the near future as a large number of new housing units are ready for release by the end of this year. In 2007 the rent will ease further,” Suwaidi said.

Commenting on the the UAE's banking sector's exposure to the real estate sector, the central bank governor said there are clear guidelines for banks' investments and loan exposures in the real estate sector.

“There should not be any worry over any bank exceeding the limits set by the central bank. There are clear reporting guidelines and strict supervision by the central bank. If there are any talks about some banks exceeding the limit, that is not true. Infact, many banks share of real estate portfolio are less than the permitted levels. While a few are nearing the limit, the central bank is keeping a close eye on them,” he said.

Banks in the UAE are allowed to lend up to 20 per cent of their total deposits to the real estate sector. The governor said yesterday that the central bank has no plans to change the current threshold limit.

On opening up of UAE's banking sector for the entry of new foreign banks, Suwaidi said, central bank will take a gradual approach to the entry of more foreign banks.

“We are a small economy with more than one third of the GDP coming from oil exports. The number of banks should justify the level of economic activity. We are gradually allowing more banks. This year we have issued one each licences to Saudi and Qatar banks more applications will be considered in the future.”

The governor hinted at the currency reserve diversification sometime this year. The central bank will consider diversification of a portion of its foreign currency reserves into euros in September this year. The central bank's board met five times this year, and the issue will come up in September when the bank is likely to take a decision. The governor has indicated that central bank would shift about 10 per cent of UAE's $24 billion reserves into euros. “We are considering to diversifying 10 per cent of our reserves. When we have monetary union in 2010, a few years later we will float our currency,” said Suwaidi. On the float of the currency the Governor said it will be a joint decision by all six GCC central banks.

Currently close to 98 per cent of UAE's reserves are held in dollar. The government and the central bank have been discussing the possibility of shifting part of its reserves form early last year when the dollar began sliding against euro.

Gulf central banks are increasingly favouring to increase the share of euro in their reserves because of the major gains made by the euro in the recent months and the overall negative long term outlook of dollar. In fact the dollar peg which all the Gulf countries currently have also can emerge a liability in the context of a secular fall in the dollar.

Dismissing the possibility of a revaluation of UAE dirham, Suwaidi said, there is no reason for UAE to revalue dirham. The valuation of the common currency will be decided by 2010.