What goes in also can go out …

The dollar’s rally this summer also increased the value of Gulf currencies such as Saudi’s riyal, cutting the cost of imports and easing pressure on authorities to revalue their dollar pegs.International banks therefore started to reverse speculative revaluation bets, withdrawing local currency deposits and draining away capital that had helped keep spreads between the money market and benchmark rates low.

Subsequently, Gulf banks have had to turn to local money markets to finance lending, causing interbank rates to climb far above the central banks’ benchmark interest rates. Rather than try to ease the liquidity squeeze, authorities have welcomed more expensive funding costs in the fight against inflation, even abetting it in the case of Saudi Arabia.