Gulf Oil States Follow US Rate Cut Move

Oil-rich Persian Gulf Arab states followed Wednesday the U.S. Federal Reserve's interest rate cut, raising concerns about rising inflation in the region that pumps a fifth of the world's crude.

The decision by the United Arab Emirates and Kuwait, the second and third-largest Arab economies after Saudi Arabia, to cut rates will increase pressure on Gulf states to end the policy of pegging their currencies to the U.S. greenback as inflationary risks rise. "Inflation is likely to be more of a problem going forward now," Michael Tomalin, Chief Executive Officer at National Bank of Abu Dhabi, the U.A.E.'s largest lender told Zawya Dow Jones. High oil prices have spurred an investment boom and led inflation to near record highs among the Gulf's sheikdoms. Inflation in the U.A.E. is projected to reach 8% in 2007, according to the International Monetary Fund. Attention will now shift to Saudi Arabia, the world's largest oil exporter, after it decided to hold rates firm, according to reports on the Arabic Al Arabya channel. In July, inflation in Saudi Arabia was at its highest level since 2001, according to central bank data. Inflation in Kuwait and Qatar also reached record levels earlier this year. "It would be worth seriously considering abolishing the dollar peg," Eckart Woertz, head of economics at the Dubai-based Gulf Research Center, told Zawya Dow Jones in a phone interview. Kuwait, a close U.S. ally, set a precedent in May ending its currency's peg to the dollar in an attempt to stem rising inflation and protect the value of its export earnings from the sale of oil against the effects of the plummeting greenback. The dollar's decline has partly undermined the benefit of record oil prices in the region that's expected to accrue a budget surplus in excess of $500 billion this year, according to Saudi lender Samba Financial Group. Crude traded in New York at near intraday records above $82 a barrel this week after the Organization of Petroleum Exporting Countries agreed to boost output by 500,000 barrels a day from Nov.1. According to a research note by Standard Chartered Bank earlier Wednesday, the rate cuts will "add more fuel to the inflationary fire" in the region. "Without the necessary monetary policy tools, the region is unable to stifle the affects of inflation on its economy. The theme of currency reform therefore is intensifying from a fundamental perspective," the note said. The U.S. Tuesday eased monetary policy for the first time in more than four years, with the Federal Open Market Committee voting unanimously to cut the Fed's funds rate to 4.75% from 5.25%. Kuwait's central bank Wednesday followed suit buy cutting its repurchase rate by 50 basis points. The new repo rate is 4.75%, down from Tuesday's 5.25%, data on the central bank's Web site show. The central bank of the U.A.E. cut its one-week, one-month and three-month certificate of deposit interest rates by 15 basis points in response to Tuesday's Fed move. The bank lowered its one-week interest rate to 4.60% from 4.75%, one-month interest rate to 4.70% from 4.85%, and three-month interest rate to 4.80% from 4.95%.