Arabian Business - Factors causing inflation of fuel and food prices ‘beyond the control of central banks’: experts

The recent UAE move to raise interest rates would take time to curb inflation, as supply-side factors continue to put pressure on commodity prices, a leading economist told Arabian Business.

Central banks across the Gulf have followed the US Federal Reserve’s decision to lift key interest rates in an attempt drag inflation down – but Scott Livermore, chief economist at Oxford Economics Middle East, said that in the UAE, the move “will do little to curb current levels of inflation in the short term.”

Recent geopolitical events, as well as ongoing supply chain disruptions, have already put undue pressure on the prices of energy, food, and other commodity prices – and these factors are “beyond the control of central banks,” Livermore said.

“The impact of interest rates takes time to feed through to demand – typically 12-18 months,” he added, noting both higher inflation and interest rates will be detrimental to overall consumer sentiment.

According to Vijay Valecha, chief investment officer at Dubai-based consultant Century Financial, the rate hike will be reflected on all loans and mortgages, pushing UAE consumers to spend less, especially as the use of credit cards is high in the country.

“The aggressive move will result in higher borrowing costs in turn causing consumers to spend less and ultimately cooling the pressure on prices,” he told Arabian Business.

“For now, consumers may feel the sting of higher prices more acutely than the pinch of a three-quarter point bump. But stack several rates increases together and consumers will start to feel the pressure,” he added.

Valecha said future hikes may be expected to further curb high inflation and this might “aggressively” affect consumers’ spending decisions. However, he noted that higher interest rates will eventually cool down inflation in the long run.

Consumers in the UAE have been feeling the brunt of high commodity prices recently. An earlier report by Emirates NBD said consumer inflation rose to 4.6 percent in April 2022 compared to the same month last year.

Transport costs led the jump in inflation, the report showed, followed by food prices, which were up 8.6 percent year-on-year.

According to PwC, interest rates were generally cut low to stimulate demand at the beginning of the Covid-19 pandemic. When interest rates are low, demand goes up, which also drives up consumer prices.

The US Federal Reserve had earlier mentioned plans to raise interest rates to control inflation, and GCC central banks were keen to follow suit.

More so in the Gulf, PwC said subsidy regimes “held bank inflation for many years, but many aspects of them have been withdrawn since 2016.”