UAE sets 5pc inflation target

DUBAI -The UAE, in an unprecedented move to arrest spiralling inflation currently estimated to be in double-digit figures, set an inflation target of five per cent for 2008.



By Issac John (Deputy Business Editor)

Published: Thu 13 Mar 2008, 8:45 AM

Last updated: Sun 5 Apr 2015, 1:19 PM

Announcing the inflation targeting policy for the first time in the GCC, Sultan bin Saeed Al Mansouri, Minister of Economy, said bringing down inflation by more than 50 per cent within this year would be an uphill task.

UAE's inflation, which was 9.7 per cent in 2006, and an estimated 11 per cent in 2007, is forecast to be hovering around 12 per cent this year on the back of soaring rents, increasing food prices, and a weakening currency pegged to a plummeting dollar.

Attributing the soaring inflation to factors within and outside the country, the Minister of Economy said he was confident that the target could be achieved through a combination of measures including price control of essential food items and rent caps, which he pinpointed as a major factor stoking inflation to record levels in the UAE.

Al Mansouri said apart from skyrocketing rents and global inflationary trends resulting a 300 per cent surge in the prices of certain food items, a weakening dirham is aggravating the situation, driving up the cost of imports and restricting the Central Bank's ability to fight inflation.

Asked if his Ministry would put pressure on the monetary authorities to ditch its

dollar peg, which has been blamed for imported inflation accounting for 40 per cent of the food price hike, Al Mansouri said it was up to the concerned Ministry to decide the currency policy. "However, it is realistic to conclude that the dollar-peg policy is contributing to the price increases."

Al Mansouri's remarks came in the wake of comments made by Shaikh Hamdan bin Rashid Al Maktoum, Minister of Finance, that the UAE is studying whether to maintain its current dollar-peg exchange rate policy. Amid mounting pressure from economists for a review of the dollar-peg policy in the light of record inflation, the UAE Central Bank has set up a currency task force to study a possible depegging or revaluation of the dirham.

Analysts said continued depreciation of the dollar against other major currencies is one of the main contributors to higher imported inflation, as much of the region's imports originate non-dollar pegged countries of Europe and Asia. Apart from soaring rental rates, monetary and fiscal factors, such as high liquidity, low interest rates, expansionary government spending and strong money supply growth in the GCC, are other domestic factors adding to inflationary pressure.

Minister Al Mansouri said the official inflation rate for 2007 would be announced within a month. "Henceforth, there will be one inflation figure."

"Targeting five per cent is a big challenge, and we hope we can achieve it. We are trying to look and see how that can be achieved," the minister said.

The UAE move came amid warning by economists that real GCC regional economy growth could slowdown due to galloping inflation, particularly in the UAE and Qatar.

Welcoming the move, analysts said inflation targeting, as a promising monetary policy framework, communicates the target and explains the policy framework to the public. "This approach promotes both price stability and well-anchored inflation expectations. The move will facilitate control of inflation and made monetary policy more transparent and accountable. An Inflation targeting policy will favourably improve the competitiveness of the economy, financial market and business environment and has substantial impacts on the banking sector," analysts said.

The UAE Ministry of Economy has concluded a year-long consumer-spending survey after collecting weekly data on the expenses of 6,000 to 7,000 families in the federation. The survey will be used to modify the index and calculate inflation going forward. This will enable the government to release data more regularly rather than just one time a year, a source familiar with the survey said. Rents, the biggest driver of inflation across the Gulf, has a 36 per cent weighting in the UAE consumer price index.


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