By Staff writer
BMI Research says Central Bank of Oman will be forced to follow the US Fed's tightening cycle over the coming months
The Central Bank of Oman will be forced to follow the US Fed's tightening cycle over the coming months, despite low inﬂation and rising liquidity pressures at home, according to BMI Research.
It said in a research noted that combined with low commodity prices, the strength of the US dollar, and weaker economic activity, Oman will adopt a more hawkish monetary policy to lead to average consumer price inflation of just 1.5 percent over 2017.
It said the US Federal Reserve's much-anticipated rate hike on December 14 "leaves the Omani monetary authorities in a quandary".
"The Central Bank of Oman will be forced to closely follow its counterpart's tightening cycle, despite deﬂation and deteriorating macroeconomic conditions at home. We expect interest rates to rise in Oman over the coming quarters, driving higher funding costs for the private sector and additional deﬂationary pressure."
The other ﬁve countries in the Gulf immediately raised interest rates, replicating the last hike by the Fed in December 2015 where only Oman and Qatar did not also raise rates.
While Oman's Central Bank has not followed the rise in interest rates by the Fed over the past 12 months, in practice rates are already rising.
The interbank rates have risen from 0.1 percent in July 2015 to 0.3 percent this June and one major commercial bank, Bank Sohar, has announced it is raising rates for loans and deposits. The rate on some personal loans rose to 5.5 percent from 4.99 percent, effective December 15, said BMI Research.
The report added that Omani price pressures will remain weak. Annual consumer price inﬂation averaged just 1.2 percent over the ﬁrst 11 months of 2016, although the period of deflation has now passed.
"Although any decision by the government to curb subsidies would present an upside risk to prices, the strength of the US dollar, low commodity prices, and weaker economic activity will combine to keep imported inﬂation low," it said.
Price pressures have remained mild in Oman in recent years, although a sharp rise in rent and food prices pushed up inﬂation to double-digits in 2008.
Under rules imposed at the height of the Arab Spring in 2011, retailers and traders have to obtain approval from an official agency in order to raise the prices of most of their products - further limiting inﬂationary pressures.