UAE cost of housing to rise further amid liquidity surge

The cost of housing, which represents a heavy component within the overall inflation rate, will rise further, as the rent caps introduced in Abu Dhabi and Dubai do not apply for new contracts, in contrast with Qatar which flattened the rents for next three years.

"The rents increased in 2007 by 18 to 19 per cent, and this will continue in 2008. Meantime, banks' assets increased by 40 per cent, accelerating money supply," said Dr. Giyas Gokkent, head of research at National Bank of Abu Dhabi (NBAD).

The reduction of the UAE key interest rate by 75 basis points from 3 to 2.25 per cent will boost economic activity in the nearest term, but it could lead to higher inflation and serious results in the longer term, economists said.

Nonetheless, international oil prices are supply some balance, as they tend to surge up in tandem with the declining dollar.

"We are looking at average oil prices of $95 to $100 per barrel in 2008, and this will increase the oil revenues dramatically by about 25 per cent to about $95 billion, compared with around $76 billion in 2007," Dalton H. Garis, associate professor at Adnoc's Petro-leum Institute, said.

"But the increasing revenues will only mean that the economy will continue to over-heat as the pace of growth will be too fast to tame," Gokkent said.

Central Bank Governor Sultan Bin Nasser Al Suwaidi had a meeting with the chairman and representatives of the Emirates Banks Association yesterday, where the governor convinced the delegation that the local banks enjoy a strong financial position, taking into consideration the availability of liquidity.

Such ample liquidity will only force banks to be more aggressive in their lending policies, adding more pressure on prices of goods and services.