Bahrain's inflation spike shows economic recovery

The economic rebound has gathered momentum in Bahrain as shown by the latest inflation data, with prices rising after a six-month slump.

During the first half of the year (H1), price rise in the country was negative, a report by Fitch Solutions said, with inflation logged at (-)1.3pc year-on-year (YoY).

The US-based rating agency, however, noted inflation in the kingdom returned to positive territory in the latest June and July readings at 0.6pc and 0.3pc respectively.

The growing price pressures are largely broad-based, with the economic rebound driving a significant increase in prices in the ‘other’ segment of consumer price inflation.

This includes components such as ‘recreation’ and ‘clothing’ which occasionally hit double-digit price growth on a YoY basis. The agency has forecast inflation in Bahrain will average 0.5 per cent this year with price growth accelerating towards the year-end. With the rebound in non-oil activity underway, Fitch expects that this will bring inflation to positive territory for the remainder of 2021 and in 2022, the expansion in consumer prices will continue to strengthen. Inflation is projected to average 1.9pc in 2022 as economic activity continues to normalise in the months ahead.

Besides, supply-side inflationary pressures are likely to persist, with Brent oil prices set to average $67 per barrel (/bbl) next year, broadly in line with the 2021 forecast of $70/bbl, as per analysis by the Fitch oil and gas team. This, in turn, will keep prices in the ‘transport’ and ‘housing and utilities’ segments of the consumer price index from falling.

The current forecast assumes no new taxes will be implemented by the Bahraini authorities.

Despite upward pressures on aggregate prices, Fitch expects that the Central Bank of Bahrain (CBB) will keep the one-week deposit rate on hold at 1pc in 2021 and 2022.

The CBB’s policy rate (the one-week deposit rate) typically mimics the US Federal Reserve (US Fed) funds rate by virtue of the dinar’s peg to the US dollar.




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