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Mon 17 Dec 2007 02:26 AM

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Oman curbs lending in inflation battle

Restrictions tightened for second time in five months to prevent lower borrowing costs from fuelling inflation.

Oman tightened bank lending restrictions for the second time in five months yesterday, to prevent lower borrowing costs from fuelling inflation which was running near a 16-year high in October.

Oman is the third Gulf Arab oil producer in six weeks to force banks to keep more money in their vaults as central banks cut interest rates in tandem with the US Federal Reserve to ease pressure on their dollar-pegged currencies to appreciate.

Omani banks are required to hold 5% of total deposits up from 3%, the central bank it said.

"There is a lot of liquidity in rials as a lot of people are changing their dollars into rials," said Sankar Kailasam, vice-president of research at Muscat-based Gulf Investment Services.

Dollar pegs force central banks in the world's biggest oil-exporting region to track US monetary policy to maintain the relative value of their currencies.

The Fed has cut borrowing costs by 100 basis points since September 18 to help contain the fallout of a mortgage crisis, and most Gulf central banks have followed by cutting rates despite the risk of stoking inflation.

Kuwait, one of six Gulf states preparing for monetary union as early as 2010, severed its peg to the dollar to contain inflation and the United Arab Emirates said last month other Gulf states should follow suit.

Oman Central Bank Executive President Hamood Sangoor Al-Zadjali ruled out any change to currency policy last month, forcing the country to use alternative means to control price rises.

Qatar, facing inflation just below a record 15% , raised its reserve ratio for the first time in more than eight years following last week's quarter percentage point Fed cut.

Saudi Arabia raised its reserve requirement for the first time in 27 years after matching a Fed cut in October when inflation was at a 12-year high of 5.35%.

Oman raised the reserve ratio by one percentage point in August, Zadjali told Reuters in September. It also changed rules to prevent banks from using their foreign currency holdings as part of the previous reserve requirement in July.

The central bank reduced the yield on its one-month certificate of deposit by more than 90 basis points in the two two months after the Fed's first cut this year on September 18.

Like its neighbours, Oman is battling inflation, which came in at 6.84% in October, below September's 16-year high of 7.1%, the Ministry of National Economy said on its Web site.

Food, beverage and tobacco prices, which account for almost a third of the index, gained 12% in the year to October 31, slowing slightly from 14% in September.

The dollar's tumble to record lows against the euro and a basket of six major currencies in November has driven up Oman's import costs.

Some 5.2% of Oman's imports in 2006 came from the US, while 17.3% came from Japan, 5.1% from Germany, 5.3% from India and 3.4% from Britain, according to the central bank's annual report.

Domestic factors were also driving inflation in Oman, as rents, which account for 15% of the index, climbed 8%. In September, Oman imposed a rent cap of 15% for the next two years.

A Reuters poll last week forecast the average rate of inflation in Oman would fall to 3.9% in 2008 from 4.4% this year.

Commerce Minister Makboul bin Ali bin Sultan said in October Oman had considered measures including unshackling its rial currency from the US dollar and price caps to contain inflation but had decided against such moves. (Reuters)

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