Rising hydrocarbon prices and fiscal consolidation measures will cause a “moderate uptick” in inflation in Qatar over the years ahead, BMI Research has said in a new report.
Overall, BMI Research forecasts inflation in Qatar to average 3% in 2018 and 3.2% in 2019, from 1.7% in 2017.
But the Fitch Group company expects inflation in Qatar to “remain subdued” over the months ahead. Modest price pressures associated with higher import costs from the ongoing diplomatic crisis in the Gulf region – and resultant restrictions on intra-regional cross-border movements – appear mostly transitory, fading with the government-led development of new supply chains. 
Indeed, while inflation ticked up from 0.1% y-o-y in May to 0.8% in June (immediately after the crisis broke out), it has since decelerated significantly, coming in at -0.5% in September. 
Crucially, growth in the price of food – over 40% of which was imported from Saudi Arabia prior to the crisis – has slowed, from a peak of 4.5% in July to 3.6% in September.
Growth in supply, meanwhile, will continue to weigh on housing prices. Housing and utilities costs decreased significantly in 2017, by a monthly average of 2.2% y-o-y in the January-September period. 
This trend has likely been exacerbated by the diplomatic crisis, which has brought about some uncertainty, and reduced the Gulf interest in the Qatari real estate market, BMI said. 
“We expect the crisis to eventually be resolved – easing some of the downward pressure – but with more major housing projects coming online, housing prices look set to remain far below the kind of levels recorded in recent years,” the report said.
That said, gradually rising hydrocarbon prices will contribute to a moderate overall acceleration in inflation over the coming years (Qatari energy prices are now indexed on movements in global energy prices). BMI expects Brent prices to average $57 per barrel and $63 in 2018 and 2019 respectively, from a forecast $53.5 in 2017.
Furthermore, once the diplomatic crisis eases, the government is likely to move ahead with plans to implement taxes on goods deemed ‘harmful to human health or the environment’ (including tobacco and sugary drinks) and on certain luxury items, which BMI said “will push the overall price level up.” 
It is also preparing to introduce a GCC-wide value-added tax in 2018 – although BMI believes the inflationary impact of this measure will be somewhat limited, given its small size (5%) and the fact that many food items and essential services (including education) will likely be exempt.


QCB to keep dollar peg: BMI
The Qatar Central Bank will continue to track the US Federal Reserve’s monetary tightening cycle through to 2019, given the riyal’s dollar peg, BMI Research has said.
“We expect the Central Bank of Qatar (QCB) to continue to track the US Fed’s tightening cycle through to 2019, in order to protect the riyal’s dollar peg . We forecast the US Fed to hike its benchmark interest rate by 50 basis points (bps) each in 2018 and 2019 – and believe the QCB will broadly follow suit. We view the QCB’s decision to leave overnight lending and repo rates unchanged in the face of a 25bps hike by the US Fed in June as only a temporary measure to limit pressure on local banks ‘funding costs over the short term,” BMI Research said.
Qatar’s large foreign reserves – sufficient to cover around 12 months of imports – mean the QCB would be able to defend the riyal’s peg to the dollar should the interest differential with the US narrow. Rising hydrocarbon prices and FIFA World Cup-linked projects are set to push economic activity and inflation up, however, weakening the case for the QCB to delay hikes over the coming years, BMI said.


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