x Abu Dhabi, UAE Friday 21 July 2017

UAE backs off inflation target

The UAE's inflation rate rose to 11.1 per cent from 9.3 per cent in 2006, the highest in more than two decades.

Sultan bin Saeed al Mansouri (right) with Majid Hamad Rahma al Shamsi (Chairman of Union Coop, left) at the Union Cooperative Society-Al Awir.
Sultan bin Saeed al Mansouri (right) with Majid Hamad Rahma al Shamsi (Chairman of Union Coop, left) at the Union Cooperative Society-Al Awir.

DUBAI // The Government will focus on containing inflation for now, rather than attempting to meet a specified figure as it had indicated in March, the Ministry of Economy said yesterday. Sultan bin Saeed al Mansouri, the Minister of Economy, said yesterday during a visit to Dubai grocery stores that his goal was to contain inflation, with the target being "lower inflation than last year's". The inflation rate in the UAE rose to 11.1 per cent last year from 9.3 per cent in 2006, the highest in more than two decades, and second only to Qatar in the GCC. In March, the minister set a UAE inflation target of five per cent for this year. "It's a big challenge whether we can achieve it," Mr Mansouri said at the time. "We need to look and see how that can happen." Mr Mansouri revised his statement a month later, and admitted that achieving the inflation target would be "a miracle", as price rises hit near-record peaks throughout the region. Increased demand for housing and soaring rental prices constitute the leading cause of inflation in the country, accounting for about 56 per cent of the rise in prices. Monica Malik, an economist at EFG-Hermes, said that internal and external inflationary pressures were as strong as last year. "In general, demand in the economy remains strong and imported inflation is increasing, following the dollar's weakness in 2008," she said. The UAE and all GCC countries, except Kuwait, peg their currencies to the US dollar, which has declined more than 50 per cent against the euro and other currencies in the past two years. Despite its strength, the housing market continues to be an attractive investment for many investors, due mainly to low interest rates. Sana Rahim Kapadia, an EFG-Hermes property analyst, said last month that the asking price of properties in Dubai had increased by eight per cent this year, while the resale value of homes in that market appreciated by 19 per cent last year. She said that despite the rising costs of homes, lower interest rates had created a perception for some consumers that property was a safe investment, which could help boost consumer confidence. Rates on interbank loans decreased 300 basis points from last year. Mr Mansouri added that consumer spending was fuelling the inflation. The UAE cannot use the most effective measure to curb spending - interest rates - to reduce or increase spending; the dirham's peg to the dollar means the Central Bank is forced to follow the US central bank, which has repeatedly cut interest rates to remedy the ongoing effects of its credit crisis. To ease the burden of inflation, the Government imposed a price cap of Dh145 (US$39) for a 39kg bag of rice. The country's largest retailers responded by reducing dozens of food items to last year's prices and agreeing to hold them for the remainder of the year. The voluntary price caps have proved effective, at least in the short term, in stabilising food prices. The ministry released data last week showing that prices for most basic food items had held steady during the year, or increased by less than five per cent. Mr Mansouri toured Carrefour and Union Co-operative Society supermarkets yesterday to highlight the two retailers' freezing of the prices of about 50 food items. Henri Changeux, the senior vice president at Carrefour, showed the minister that the company had stocked adequate supplies of the agreed items, but told him that he was concerned that other retailers could exploit the voluntary price caps by buying those items for their own commercial use. "Our main problem is to dedicate these products for consumers, not other retailers," Mr Changeux said. He declined to elaborate. The Government has also been pursuing agricultural land purchases in other countries to make the UAE less susceptible to unstable food prices.