Standard Chartered Bank has backed a suggestion by Dubai International Financial Centre (DIFC) that GCC countries should drop their currency peg and tackle inflation.

DIFC made its suggestions in a report on progress towards GCC monetary union which said the states would have to have more tools to tackle inflation, a top priority in establishing a single currency.

The DIFC also highlighted three key institutional developments that will be critical for the successful launch of the monetary union.

First is the modus operandi of a GCC central bank, second, the availability of reliable and harmonised economic statistics, and third a uniformed payment system.

In an economic report on Wednesday, Standard Chartered Bank said the DIFC findings were consistent with the bank’s long held views on monetary union.

’Our view has been that the main obstacles towards the 2010 deadline, are not related to the convergence criteria which we see as more or less irrelevant for the region, but mainly related to the absence of supra national institutions such as a GCC Central Bank,’ the bank report said.

It argued that introducing an inflation target without changing the currency pegs to the US dollar would be impossible.

’In the presence of free capital mobility, it is impossible for monetary authorities to be targeting the exchange rate and inflation at the same time,’ the report stated.

’Something has to give, and the DIFC clearly suggests that something should be the exchange rate.

’We could not agree more with this view. We have written extensively on this topic, supporting the case for reform. Our view is that inflation in the GCC is rising and monetary policy is severely constrained by the presence of the pegs.

’Not only are GCC currencies weak, despite the recent dollar rebound, but interest rates are also following the decisions of the Federal Reserve.

’GCC countries need tighter monetary conditions and this cannot happen without altering the current pegs, either by revaluing, targeting their currencies against a basket of currencies rather than just the dollar, or ideally a combination of the two,’ it said.

’The comments by the DIFC are important and they are coming at a time when the debate on the currency has been waning,’ the bank report added.

’It is, however, worth bearing in mind that the DIFC can provide its views, but it is not the body that will execute them and make the decision on the exchange rate.

’Despite the strong economic argument for currency reform, the timing and nature of any change is still likely to be a decision that will be made at the highest level,’ the report said.