Middle East faces headache on inflation and higher rates



Deutsche Bank has warned that the Middle East must expect higher inflation or a rise in interest rates as a consequence of trillions of dollars of central bank monetary intervention spilling over from developed markets.

Anshu Jain, the co-chairman of Deutsche Bank's board and executive committee, also told business leaders in Dubai that the next phase of the global economic downturn could hinge upon what triggers central banks to start raising interest rates, currently at historic lows.

"It's an issue that really concerns us. There's never been a period of such unprecedented liquidity injections, and what'll happen when that trigger comes?" he said.

"The slightly worrying answer is nobody really knows. History hasn't given us that chapter yet. We're writing it."

The Federal Reserve in the United States and the European Central Bank have all pledged to step up bond-buying programmes with potentially unlimited sums of capital in an effort to stabilise economies that are still showing signs of fragility after the global financial crisis.

The Bank of England and Bank of Japan have also increased quantitative easing since the start of this year. Deutsche Bank, Germany's biggest lender and one of Europe's largest investment banks, expects interest rates in developed markets to remain low "for some time".

"My concern for the US and this region as well is that this money tends to flow into very specific asset classes," such as real estate, said Mr Jain. "We're seeing some of that in our home market, Germany, as well, but we haven't seen core inflation yet."

If widespread increases in consumer prices materialise, authorities may be unable to contain rising core inflation for a sustained period of time and would have to choose between boosting job creation and containing inflation. This would have an impact on dollar-pegged economies such as the UAE and other Arabian Gulf states.

With the exception of Kuwait, GCC central banks are obliged to import US monetary policy because of their currencies' dollar pegging, giving them limited scope to tighten money supply.

Western policymakers would be faced with a "very pernicious problem", added Mr Jain, because they would "have to choose between two evils", either lower job creation or higher consumer prices.

In the meantime, regulators' response to the financial crisis was doing little to address the issue of global banks becoming "too big to fail" - that is, lenders whose systemic importance is such that taxpayers are in effect forced to rescue them in the event of their collapse.

"Regulators want banks to get smaller and more competitive. The reverse is happening," said Mr Jain. He expected that regulators were forcing a greater degree of consolidation on to the banking sector, partly linked to higher capital requirements brought about by the stringent Basel III rules, which compel banks to build up bigger capital buffers.

UBS has announced layoffs equivalent to almost a sixth of its workforce as the Swiss bank divests from operations such as bond trading that bring increased capital requirements. Credit Suisse also restructured its global investment banking operations this week, in a move said to be "in alignment with the new regulatory reality".

With increased consolidation, the number of global banks could fall, said Mr Jain. "A number of our peers are signalling a desire to step off the world stage. I think by the time we're done, no more than five or six global universal banks will be left standing.

"Clearly Deutsche Bank wants to be one of them. But we're not taking our position for granted."

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