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Monetary policy not impacting UAE inflation, says Central Bank

DUBAI — Dismissing suggestions that UAE's monetary policy has been impacting inflation, the Central Bank Governor stressed that the creation of more housing units will "not just cool down but eliminate" inflation which this year crossed 11 per cent in Abu Dhabi.

In an interview with .commerce, the Central Bank Governor, Sultan bin Nasser Al Suweidi, also rejected suggestions that by raising interest rates, the UAE could curb inflation. The UAE Central Bank has traditionally been following US Federal Reserve in defining monetary policies. Instead of raising interest rates, the UAE had to cut the rate on Certificates of Deposits two times within weeks last month in line with the US Federal Reserve's decision to lower its benchmark interest rate from 5.25 per cent to 4.75 per cent.

The move was seen by most economists as further aggravating current persistent inflationary pressures.

However, Suweidi insisted that the solution to high inflation is not with monetary policy. "We do not believe the monetary policy is the right medicine for the inflation. It is here because of shortages of housing units and office space," he was quoted by the Dubai-based magazine.

The Central Bank Governor said the key to curbing inflation is in fiscal policy planning and government spending. Insisting that the supply of additional housing units will eliminate inflation, Suweidi rejected views that UAE's dollar-peg policy is the root cause of inflation. Drawing a parallel between Saudi Arabia and the UAE, he questioned: "We (Saudi Arabia and the UAE) peg our currencies to the dollar. Our monetary policies are the same. How come they don't have inflation? How come we have inflation?"

However, latest data shows that Saudi inflation hit a seven-year high of 4.4 per cent in August, driven mainly by a record 12.1 per cent jump in rents and a 6.6 per cent rise in prices of food products. The data raised pressure on the central bank which is torn between the need to contain prices and avoid appreciation of its dollar-pegged currency. UAE's inflation last year was officially put at 9.3 per cent.

Suweidi said since 30 per cent of UAE's imports come from Continental Europe and the UK, where currencies are not pegged to dollar, imported inflation accounted for two per cent.

The Central Bank Governor's observations came ahead of latest figures that showed an increase in Abu Dhabi's inflation in the first half of this year to 11.3 per cent. UAE's official news agency WAM, citing Economy and Planning Department, said Abu Dhabi's consumer price index for the first half rose to 147.1 from 132.2 in the same 2006 period.

Property analysts said the housing shortage in Abu Dhabi is expected to continue through 2010 despite the ongoing building boom as population growth outpaced supply of residential units.

Although projects valued at more than Dh200 billion are under way to create residential clusters as well as new hotels, the emirate's population surge which is expected to double within a decade, will result in a sustained shortage for the next three years, they said.

A report by The National Investor, quoted by Bloomberg, estimated that as many as 220,000 units will be delivered in Abu Dhabi over the next decade, while RSP Group projects that supply to 250,000 housing units will be required to meet demand in the same period. "About 140,000 units should come onto the market in 2009 and 2010, compared with about 10,000 in 2008 and 2009. Demand during those three years may average about 18,000 units per year," TNI said.

In a report, RSP Group, is a leading real estate and hospitality investment advisory organisation in the Middle East, noted that there is a severe shortage of residential property in the capital.

"Right now we are seeing a deficit situation in Abu Dhabi be it residences or hotel rooms. The population of Abu Dhabi will double in the next ten years and we anticipate between 225,000 to 250,000 new units of housing will be required," the report said.