Money supply rises as inflation threatens

UAE money supply has accelerated as officials warn inflation in the country will rise higher than forecast. M3 money supply rose at an annual 2.1 per cent last month from 0.4 per cent in May, data from the Central Bank showed yesterday. The broadest indicator of money supply, M3 includes normal savings and currency outside banks.

Rises in the cost of housing, food and drinks and transport pushed inflation up by 0.95 per cent last month from June last year. For the first six months this year, consumer prices in the UAE crept up 0.43 per cent compared with the first half of last year, National Bureau of Statistics data showed. Officials had forecast inflation levels would remain muted this year, staying between 1 and 1.5 per cent by the end of the year.

But the bureau now thinks that estimate may be too low. A recovery in property prices and higher import prices of basic foodstuffs, steel and building materials was expected to raise inflation above that forecast, a report released by the bureau said yesterday. But inflation is not expected to reach the double-digit peaks of 2007 and 2008, when rising prices in the property market aggravated inflationary pressures.

"I have no concerns over the pace of price growth," said Simon Williams, the chief economist in the Middle East at HSBC. "My forecast is still for annual inflation of 1 per cent in the UAE this year." Mr Williams said it was difficult to square the bureau's data with recent reports from property companies showing rents were still declining in Abu Dhabi. M2 money supply rose to 5.4 per cent last month from 4.2 per cent in May, the Central Bank data showed. M1 supply, the narrowest measure, rose to 6.3 per cent last month from 3.6 per cent in May.

Bank loans picked up 0.4 per cent to Dh1.02 trillion (US$279 billion) last month from May, other figures from the regulator showed. Deposits grew 1.5 per cent to Dh985.4bn over the same period. The gap between loans and deposits narrowed to Dh40.2bn last month from Dh50.4bn in May. Meanwhile the IMF urged Gulf states to strengthen regulation of their financial industries without restricting credit conditions and affecting economic growth.

"This requires a continued forward-looking approach to monitoring bank capital adequacy through periodic reviews of bank asset quality and regular stress testing," the IMF said. @Email:[e-mail]