Inflation in the UAE is set to witness a moderate increase next year with the implementation of five per cent value added tax (VAT) from January 2018, analysts said.

“Inflation in the UAE is expected to be circa 2.5 per cent in the current year. Introduction of VAT in 2018 is likely to see this rise to over three per cent,” said Anita Yadav, head of fixed income research at Emirates NBD Research. She noted that there are multiple factors that affect inflation including interest rate hikes, currency strength and economic growth.

Akber Naqvi, executive director and head of asset management at Al Masah Capital, sees VAT increasing inflation by 1.5 per cent to two per cent in the first year post introduction. However, the impact will start to normalise in the following years as the initial impact will be factored in during the first year of introduction.

According to the International Monetary Fund, UAE inflation is projected to reach 3.6 per cent in 2018, almost 80 basis points higher than the estimated 2.8 per cent in 2017.