A rapid decline in the UAE's inflation rate to 1.9 percent in April does not signal that deflation is around the corner for the second-largest Arab economy, the central bank governor said on Thursday.

The governor also said the mismatch between loans and deposits at UAE banks -- which has left banks short of liquidity to extend new loans -- was narrowing and was unlikely to need any measures by the central bank to rectify the problem.

Annual inflation in the UAE slowed to 1.9 percent in April and prices dropped between January and April led by a housing price slump, the UAE's first-ever monthly inflation data showed on Wednesday.

Economists said the data could signal the UAE -- where the emirate of Dubai is suffering from sharp real estate price declines -- will experience full-year deflation after inflation soared to a 20-year peak of 12.3 percent last year.

"The dynamics in the United Arab Emirates does not really have a scope for deflation," Sultan Nasser Al-Suweidi told reporters on the sidelines of an economy ministry event in Dubai, without elaborating on his definition of deflation.

"I think we will use the extra capacity to expand our economy and go ahead."    

The UAE consumer price index fell 2.7 percent in the three months to April reflecting a 5 percent drop in the housing index over the period, while costs for transportation, communications, furniture, services and medical care also declined.

"It is expected of course under the circumstances ... We are in a global financial crisis and global economic crisis now so you expect inflation to decline," Suweidi said.

Meanwhile, central bank data this week showed the gap between loans and deposits at UAE banks narrowed to 36.1 billion dirhams at the end of April from 71.2 billion dirhams at the end of December.

"If they (loans) run at 200 miles per hour and deposits run at 100 miles per hour of course they will go way way ahead," Al-Suweidi said, referring to a substantial credit boom in the UAE that was spurred by an oil price rally to almost $150 a barrel last July.

Total credit in the country doubled between 2006 and 2008 as banks financed massive infrastructure and real estate expansion projects.

Hundreds of billions of dollars of projects have been shelved in the last six months, while the deepening financial crisis and a drop in oil prices toward the end of last year prompted banks to take greater caution with new lending.
    "The gap has shrunk to a great extent," Al-Suweidi said.

"If they (loans) slow down to 50 miles per hour and the deposits rates run at 100 then they will catch up of course. I hope that we will not need to take any measures. The market will correct itself by itself." - Reuters