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Gulf move quells dollar-peg talk
Saudi Arabia, the largest economy in the region, reduced one of its interest rates by 25 basis points while raising banks reserve requirements to limit the growth of monetary supply in a bid to tame rising inflation. Five of the six Gulf Co-operation Council members peg their currencies to the US dollar and therefore usually follow US interest rate decisions. Kuwait in May abandoned its dollar peg, citing rising levels of inflation imported by the weakening dollar. The economic boom in the oil-rich Gulf, where oil prices have quadrupled during the past five years, should dictate higher interest rates, rather than the looser monetary policy being dished out to a US economy struggling to come to terms with the summers subprime mortgage crisis. Increasing the Saudi reserve requirements is a way of tightening the monetary environment without raising rates, said Simon Williams, an economist with HSBC in Dubai. Speaking to reporters in London, Prince Saud al-Faisal, foreign minister, quelled speculation of any Saudi intention to drop the dollar peg. Why would one do that? he said, adding only half-jokingly that there arent enough euros around. In September, Saudi Arabia ignored the Federal Reserves 50 basis-point cut, triggering speculative flows into the riyal that wrongly bet on a Saudi revaluation. Saudi Arabia on Thursday also gave plans for a single Gulf currency a much-needed boost, predicting the majority of states in the Gulf Co-operation Council, including Riyadh, would join by the agreed date of 2010. Perhaps not collectively, but the majority will achieve it, Prince Saud said, referring to the single currency. The foreign ministers comments come ahead of next months GCC heads of state meeting in Qatar that will provide some measure of progress towards the troubled single currency project, even though a final decision on the planned deadline has been pushed back until next year. Oman has publicly opted out, saying it will not be able to harmonise its economy in time to meet the 2010 deadline for monetary union. Saudi Arabias central bank governor has said the target is difficult, while the UAE central bank governor has suggested that the six-member block may push back the stated deadline by five years. As their economies are fairly harmonised, monetary union could still happen with the right amount of political will, but the progress so far indicates it wont happen on time, said Monica Malik, a Dubai-based economist with regional investment bank EFG-Hermes. Posted by: lotp 2007-11-03 |
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