The UAE Economic Base.

The UAE Economy Ministry on May 2 said currency pegs and high oil and food prices were compounding inflation but warned that exchange rate and other tools should be treated with more caution. The UAE on May 1 was the first dollar-pegged GCC state to match a seventh US interest rate cut since September. Dollar pegs in all GCC states but Kuwait compel them to track the US Federal Reserve, though inflation is spiralling and their economies are booming. (Kuwait in May 2007 pegged its dinar to a basket of currencies).

At an Arab business conference in Beirut, Economy Minister Sultan bin Sa'id al-Mansouri said: "This [inflation] phenomenon is an expected product of our region's economic boom, but is being compounded further by other factors such as globally rising food commodity prices, currency pegs, and excessive oil price rises... Monetary and exchange rate tools and fiscal options have to be considered with greater caution as they could trigger economic distortions". In April Mansouri said it would be a "miracle" if the UAE met its 5% inflation target this year.

The UAE, the second-largest Arab economy, has tried to curb inflation partly by signing agreements with supermarket chains to fix food prices at 2007 levels (see the economic background in down21UAEbaseMay22-06).