Gulf inflation threat mounts as oil hurdles to $150

By Daliah Merzaban - Analysis

DUBAI (Reuters) - Oil's rapid acceleration toward $150 a barrel threatens to spur Gulf Arab inflation to new records as currency pegs to the ailing U.S. dollar prevent the oil producers from mopping up excess liquidity.

As Gulf central bankers prepare for a key meeting in Doha on Monday, the oil price surge places more pressure on Gulf states preparing for monetary union to follow Kuwait's lead and revalue their currencies to fight inflation.

Oil jumped nearly 9 percent to a record $139 a barrel on Friday -- and could top $150 in less than a month as strong demand in Asia triggers a slowdown in shipments of crude to the United States, investment bank Morgan Stanley said last week.

For Saudi Arabia and the five other states that form the world's biggest-oil exporting region, rocketing oil revenues could drive public spending, fuelling money supply and stoking inflation in economies that doubled in size from 2002 to 2006.

But Gulf states -- bar Kuwait -- are constrained in their fight against inflation by dollar pegs which have forced them to track seven U.S. interest rate cuts totaling 325 basis points since September.

"All of the shocks of high oil prices are being absorbed by the real economy rather than the exchange rate or interest rates," said Marios Maratheftis, regional head of research at Standard Chartered Bank. "Prices show no signs of slowing down."

Inflation in the kingdom, the world's biggest oil-exporter, hit an at least 30-year peak of 10.5 percent annually in April, while in Qatar, the world's largest exporter of liquefied natural gas, prices soared at an annual rate of 14.75 percent in the first quarter.

Prices will rise by an average of 9 percent in most Gulf states this year as rents and global commodity prices surge, a Reuters poll showed last month.

But high oil prices cannot alone be blamed for inflation, analysts said.

Other global oil producers, including Canada and Norway, have low inflation rates largely because their currencies have strengthened against the dollar, which is down almost 20 percent against the euro since the beginning of 2007.

"Increasing oil prices encourage governments to spend more money given the capacity constraints in the region," said Paul Gamble, head of research at Saudi-based investment firm Jadwa Investment.

"That should push the exchange rate up and dampen the impact of inflation."

CURBING SPENDING

While rental and food prices -- the main drivers of inflation -- should begin to taper off, money supply growth will continue to drive inflation for at least three to four years in the Gulf, Gamble said.

"Inflation is spreading to other parts of the economy through liquidity created through high oil prices and negative real interest rates," he said.