Inflation in the United Arab Emirates hit a one-year high of 0.88 percent on an annual basis in May but edged down slightly on the month on lower housing costs, the data showed on Sunday.

The Opec member saw months of deflation over the past year but analysts expected prices in the world's third largest oil exporter to rise slightly in 2010 helped by economic recovery.

Consumer prices started to rise again in March to reach 0.79 percent year-on-year in April, after three months of declines.

On the month, UAE consumer prices fell 0.07 percent in May compared to a decrease of 0.04 percent in the previous month, data from the National Bureau of Statistics showed.

"We have three factors limiting inflation: the overhang of housing, the strength of the dollar, and the monetary policy," said Tim Fox, chief economist at Emirates NBD. "Monetary policy, because interest rates are above inflation, is restrictive."    

The UAE central bank kept its benchmark repo rate at 1.0 percent since January 2009, when it cut it by 50 basis points to limit impacts of the global credit crunch. Its policy flexibility is limited by the dirham peg to the dollar.
   
Prices of housing, which has a 39 percent weight in the overall basket, dropped by 0.52 percent on the month in May, for the second month in a row, after a 0.68 percent fall in April.

On the contrary, food prices, which account for 14 percent of the basket, jumped by 1.16 percent, following a 1.24 percent increase in April. Transport costs grew 0.46 percent in May, a slowdown after a 1.12 percent rise in the previous month.

Analysts expect price pressures in the UAE, which faces slow credit growth due to multi-billion dollar debt restructuring in Dubai, to stay muted this year on ample housing supply and the greenback's strength following the euro zone crisis. - Reuters