The Gulf is heading towards a dangerous future of rising infl ation, according to a report by the National Bank of Dubai, Arabian Business.com reported.

The study asked whether the GCC should opt for an infl ation targeting policy regime and predicted that the region was heading towards a future of increasing infl ation caused by three main drivers. The fi rst, according to the report, is pegging GCC currencies to the US dollar, which is a main contributor to higher imported infl ation as the dollar continues to depreciate against other major currencies. Skyrocketing rental rates, having a multiplier effect on all other sectors, is also a signifi cant domestic driver of price rises.

Additionally, monetary and fi scal factors including high liquidity, low interest rates (negative real interest in Qatar and the UAE), expansionary government spending and strong money supply growth in the GCC are adding to infl ation, the report suggested.

Underlining the impacts of rising infl ation, the paper said real GCC regional economy growth was expected to slowdown in the UAE and Qatar.

This will in turn affect the competitiveness of these economies and hinder their diversifi cation as attracting direct foreign investment becomes more challenging.

With this explanation, the report stated that higher infl ation could prevent the GCC region from emerging as a major industrial centre. It added that the greatest challenge facing regional governments is their ability to deal with rising infl ation. This said, higher infl ation is the main reason behind increasing living costs in the GCC, especially in the UAE and Qatar.