Real interest rates, oil, and inflation: implications for Saudi Arabia and the Emirates

Abstract

The recent decision by the Governor of the Bank of England, Mark Carney, to support monetary policies that effectively deliver negative real rates of return on U.K. gilts, coupled with Janet Yellen’s consideration of negative interest rate policy (NIRP), suggest that the "powers-that-be" in the West are cautiously revisiting the requisite monetary and fiscal economic policies to be applied against three distinct economic scenarios: recession, deflation, and stagflation. Key factors to be evaluated in a discussion of this shift include the broader economic malaise that appears to have set into the Eurozone, the fears regarding a "deflationary trap in China", the possible end of the Japanese recovery under Abe-nomics, and the less than stellar recovery by the U.S. from the events of 2008 and 2009. This article will explore the implications of recession, deflation, and stagflation as they relate specifically to the United Arab Emirates (U.A.E) and in general to the entire Gulf Cooperation Council (GCC). The three scenarios can be termed "the Good, the Bad - and the Ugly". This article will comment on pressures that arise from such scenarios, but is in no way a commentary on actual policies adopted by the Saudi or U.A.E central banks, nor, to the extent that these central banks are not independent of their governments, on each government’s policy of the day.