Dubai: The chances of the UAE revaluing the dirham this year may have risen.

Any revaluation would be relatively small in size, between three to five per cent, according to a research note issued by the bank yesterday.

With the GCC central bank governors scheduled to meet next week in Medina, Saudi Arabia, there is speculation of changes to currency regimes. 

Standard Chartered Bank says that although the central scenario is that the UAE will leave the peg in place at its current level, "it is clear that the central bank is re-examining its foreign exchange policy and ... the risks of a move are rising with time."

The revised estimation follows comments emerging from credible sources, said Steve Brice, regional head of research. "This was not being discussed 12 months ago, and now it is being discussed in various ways. The Central Bank Governor has indicated that it is going to be looked at." 

The note suggests three reasons why it is unlikely for the region to opt for a managed currency float, which would enable control over interest rates.

First, it would be a complex system to manage. "There's a lot of work to be done on ascertaining the fair value of currencies of the region," Brice says.

Second, "the central bank does not have at its disposal tools to manage liquidity in the financial system, an absolute necessity if they are going to manage interest rates effectively."

Third, it may be that the authorities are concerned about imported inflation rather than the low interest rates which Standard Chartered believes are the main culprit behind inflationary pressures. Any revaluation would probably be small because of the need not to impede diversification efforts, the bank explains. It would take account of the export competitiveness of non-oil activity.

They would have to manage that balancing act very carefully, Brice suggests. "Assuming that this solution is pursued, what you don't want to see is 10 to 15 per cent appreciation of the currency. Three to five per cent is it going to have massive impact on reducing inflation? No. Is it going to have a massive impact on the economy? No. You could argue that this is a step in the right direction to balance the two things. And of course if they find that it's not enough, they can do it again."