May 1 (Bloomberg) -- Gulf states are considering dropping their pegs to the dollar after the U.S. currency's decline stoked inflation across the region, Kuwaiti Finance Minister Mustafa al- Shimali said. ``Yes, there are some'' Gulf Cooperation Council states considering dropping their pegs to the dollar, which has fallen 13 percent against the euro in the last 12 months, al-Shimali said in an interview in Kuwait late yesterday without naming the countries. ``Some countries will do what we are doing.''Al-Shimali's comments may restoke speculation of a change in Middle East currency systems that eased after the United Arab Emirates and Qatar last month ruled out any revaluation or dropping the dollar peg in the short term. The issue will remain a key issue as long as inflation remains high.
``Inflation is rising in the Gulf to a great extent because of loose monetary policy,'' said Marios Maratheftis, head of research for Standard Chartered Plc in the Middle East in a telephone interview from Dubai. ``Tightening monetary policy can only happen if they drop their currency pegs or strengthen the currency, preferably both.''
The U.A.E., Bahrain and Qatar lowered their benchmark interest rates today by a quarter point, matching a cut by the U.S. Federal Reserve a day earlier. The move is needed to maintain the dollar pegs. Saudi Arabia is on its weekend while Oman moves its interest rates in line with the London Inter Bank Offered Rate.
Inflation is running close to 10 percent in Saudi Arabia and the U.A.E., while Qatar's consumer prices rose 14 percent in the fourth quarter. The Kuwaiti dinar has appreciated 7.9 percent against the dollar since the nation in May became the only Gulf Arab state to drop its peg to the U.S. currency. Contracts to buy U.A.E. dirhams in 12 months time are trading at a 2 percent premium and Saudi riyal forwards are trading at a 1.3 percent premium to the spot price, suggesting that some traders are betting that those countries will follow Kuwait in revaluing. The link to the dollar meant that imports in euros and other currencies that have strengthened against the dollar became more expensive.
The idea of dropping the peg ``has been started by other Gulf countries and they are partially going this way because the dollar has been going down for some time,'' al-Shimali said yesterday.