Gulf inflation overshadows U.S. Paulson visit

By John Irish

DUBAI (Reuters) - Gulf inflation is still rising at breakneck speed, new data signaled on Monday, spurring calls for gas exporter Qatar to drop its dollar peg and casting a shadow over U.S. efforts to restore support for the greenback.

Inflation in Qatar, one of six nations in the Gulf Cooperation Council (GCC) economic and political alliance, rose for a third quarter running in March to a near record of 14.75 percent, official data showed.

"Things are not getting better. Action should be taken," Ibrahim al-Ibrahim, the top economic adviser to the country's ruler, told Reuters by telephone from the Qatari capital when asked about dropping the peg.

Qatar's steamy rate of inflation is symptomatic of the roaring oil-fueled growth in the Gulf Arab states, which has increased pressure on the GCC to shed the policy of pegging currencies at fixed rates to the weak U.S. dollar.

It also partly overshadowed the last day of a four-day tour to Saudi Arabia, Qatar and the United Arab Emirates by U.S. Treasury Secretary Henry Paulson to defend the dollar's status as the world's reserve currency.

Experts say the Gulf states are likely to review their currency pegs -- which forced them to cut interest rates in lock-step with the U.S. Fed -- as persistent inflation and booming economic growth threaten to destabilize their economies.

"Given the announcement today and the increase in inflation in the GCC, it is likely in the second half of this year that they will place this decision back on the agenda," said Hany Genena, senior economist at investment bank Gulf Finance House.

Genena said a postponement of the planned 2010 GCC currency union would give the Gulf states leeway to modify their currency regimes. But he added that the weak dollar was not the unique source of inflation, with supply bottlenecks and roaring demand also contributing.

"Depegging can help but is not the panacea. There has to be some other solutions to long-term supply side factors," he said.

BOOMING ECONOMY

Forward currency contracts indicated that investors were betting on a 2.95 percent appreciation in the Qatari riyal in six months, 4.2 percent in a year and 8.4 percent in two years, showing that market participants were betting that the riyal would either revalue or be depegged.

Qatar's Consumer Price Index reached 166.87 points at March 31, the country's planning council said on its website. The index was at 145.42 points on March 31 last year, according to earlier planning council figures.

Inflation at the end of December was 13.74 percent. The last time it was higher was on March 31 last year when it was 14.81 percent.

As in other Gulf Arab oil producers, Qatar's economy is booming due to a near seven-fold surge in oil prices in the last six years, while it is having to lower interest rates because of its peg to the dollar. This is fuelling speculation that the country might drop the link in favor of a basket of currencies.

Economists expect GCC economic output to surge past the $1 trillion mark in 2008 -- a three-fold increase in only five years -- but with the biggest risk coming from inflation due in part to the weak dollar, but also to supply bottlenecks for construction staples like cement, and to rising food costs.