Gulf dollar peg will increase inflation in 2008

by Richard Kilner

Story link: Gulf dollar peg will increase inflation in 2008

Merrill Lynch has released a report indicating that Saudi Arabia could see its inflation reach 6% in 2008, up from 4% in 2007.

The report also predicts that the second largest Arab economy, the United Arab Emirates, could see prices rise by 12%, compared to 10% over the last year.

The inflation of economies with currencies pegged to the dollar is predicted to rise, due to interest rate cuts that will then boost borrowing.

The monetary pegs which oil producers, aside from Kuwait, employ force the countries to mirror US monetary policy, which has recently seen the Federal Reserve slash interest rates by 75 basis points.

The US policy has been aimed at bolstering the faltering economy, however, Gulf states have seen oil prices rise rapidly in recent years and their inflation has also risen quickly.

Qatar may be the most inflationary nation, with a possible rate of 14.5% in 2008.