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UAE Cbank says No Need to Tighten Lending Curbs - ASHARQ AL-AWSAT English Archive
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DUBAI (Reuters) – The United Arab Emirates central bank sees no immediate need to tighten bank lending restrictions to slow credit growth, it said on Thursday, adding a surge in demand for the dirham was not stoking inflation.

“We don’t see any need at the present time to raise reserve requirements,” Central Bank Governor Sultan Nasser al-Suweidi said after a speech to a bankers’ lunch.

Since November, Saudi Arabia and two other Gulf Arab oil producers that peg their currencies have forced banks to keep more money in their vaults to prevent lower borrowing costs from fuelling inflation running at decade highs across the region.

Price rises in the UAE, the second-largest Arab economy, were 9.3 percent in 2006, the highest since at least 1988.

Expectations that Gulf states will revalue their currencies or sever their links to the weak dollar have driven pressure on the currencies to appreciate.

The UAE dirham hit a 17-year high in November after Suweidi said he was under mounting social and economic pressure to sever the dirham’s dollar peg and track a currency basket, including the euro. He backtracked on those comments this month.

Suweidi declined to say whether he was studying revaluing the dirham.

Asked whether low interbank interest rates and a surge in dirham liquidity would feed into higher inflation, Suweidi said:

“We haven’t seen any relationship, or very, very little relationship, between inflation and monetary expansion.”

He added: “Economic theories do not work perfectly in emerging economies like the UAE.”

The UAE was stepping up its monitoring of inflation, Suweidi added.

“Inflation is the responsibility of the Ministry of Economy. The UAE is setting up a special statistics body to oversee inflation,” he said, without elaborating.

Gulf countries are struggling to control surging inflation, without being able to raise interest rates — because most peg their currencies to the dollar, they have been obliged to cut rates in line with the U.S. Federal Reserve.

The UAE matched a 25-basis-point Fed cut this month to ensure investors would not make higher returns in their dollar-pegged currencies than they would get in U.S. deposits.

Raising the reserve requirement reduces the amount banks can lend, so it can curb inflation by slowing money supply growth.

UAE inflation will accelerate to a new 19-year high of 10.1 percent this year before easing to 8.9 percent in 2008, a Reuters poll of 12 economists forecast this month.

“Others are raising reserve requirements to address the same problems that the UAE is experiencing,” said Giyas Gokkent, head of research at the National Bank of Abu Dhabi.

The UAE, which promised some Federal Government employees a 70 percent wage increase beginning in January, could face fresh inflationary pressures and its lack of action could signal it is looking at reforming exchange rate policy, he said.

In November, Saudi Arabia raised the reserve requirement for the first time in 27 years after matching a Fed cut in October when inflation was at a 12-year high of 5.35 percent.

Qatar, facing inflation just below a record 15 percent, raised its reserve ratio for the first time in more than eight years after this month’s 25-basis-point Fed cut. Oman also upped its requirement for the second time in five months.

EFG-Hermes said last week the UAE was 60 percent likely to revalue its dirham in the first half of 2008.

Suweidi declined to comment on whether he would serve another four-year term as governor after his current term expired earlier this month.

Suweidi said earlier this month he was seeking to stay on in his role for another term. The UAE government could take as long as two months to renew his mandate, he said.

Asharq Al-Awsat

Asharq Al-Awsat

Asharq Al-Awsat is the world’s premier pan-Arab daily newspaper, printed simultaneously each day on four continents in 14 cities. Launched in London in 1978, Asharq Al-Awsat has established itself as the decisive publication on pan-Arab and international affairs, offering its readers in-depth analysis and exclusive editorials, as well as the most comprehensive coverage of the entire Arab world.

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