Inflation Risk

Qatar recorded inflation at 13.7% in December, Saudi inflation hit 6.5% in the same month - the highest in more than 12 years. Oman's inflation figure for November was a 16-year high of 7.6% and analysts put U.A.E. inflation at above 10% for the same year.

 

Gulf states that peg their currencies to the U.S. dollar for easier currency management must match Fed rate moves to avoid speculative inflows of funds aimed at exploiting interest-rate differentials.Policy makers in the Gulf appear split over any coordinated moves by the economic group known as the Gulf Cooperation Council, or GCC, to change existing foreign exchange policies.

 

Mohammed Al-Jasser, Saudi Arabia's deputy central bank governor, told Zawya Dow Jones last month that Persian Gulf Arab states should maintain their currency pegs to the U.S. dollar regardless of rampant inflation in the region or the impact of U.S. rate cuts. Al-Jasser's opposition to a change in policy is not shared by all Gulf states.

 

Sheikh Hamad bin Jassem Al Thani, Qatar's Prime Minister, said on the sidelines of the World Economic Forum in Davos, Switzerland, that Qatar was studying possibly delinking its currency from the greenback.Kuwait, the third largest oil producer in the GCC after Saudi and the U.A.E., abandoned its policy of pegging its currency to the U.S. dollar last year in favor of an exchange rate band.