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Tue 19 Oct 2010 05:00 AM

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Qatar central bank on guard against heavy capital inflows

Liquidity management and ensuring orderly financial market conditions were of 'paramount importance'

Qatar central bank on guard against heavy capital inflows
NEW CITY: Lusail City, which will accommodate 200,000 people, will be in place by the third quarter of 2015.(Getty Images)

Qatar's central bank said on Monday it needs to guard against a large interest rate differential with advanced economies, which could spur heavy capital inflows, and must ensure sustained bank lending to support growth of the Gulf Arab economy.

The central bank, in its 2009 financial stability review, released on Monday, said liquidity management and ensuring orderly financial market conditions were of "paramount importance" given the return of capital inflows to the Gulf.

"With the Qatari riyal pegged to the dollar, a large interest rate differential between Qatar and advanced economies may lead to heavy inflows of capital with its attendant challenges for liquidity management and financial stability," it said.

"However, in light of recent experience, it has been possible to effectively meet these challenges by adopting a flexible approach in the conduct of monetary policy and complementing it with measures that strengthened financial stability," the central bank said.

Qatar cut its overnight deposit rate by 50 basis points to 1.5 percent in August, the first reduction in more than two years, to support the non oil economy and curb capital inflows.

The dollar peg limits the central bank's flexibility to move too far from the US benchmark rate as that could put its currency link under pressure.

The US Federal Reserve is expected to keep rates in a range of zero to 0.25 percent through mid 2011.

The Qatar central bank also said the banking system was sound and banks had comfortable provisions against non performing loans.

The Qatari government spent about 6.5 percent of GDP last year on capital injections and other measures to maintain stability in the sector.

The world's top liquefied natural gas exporter is set to see double digit growth this year, well ahead of the rest of the Gulf, due to expansion of its gas facilities and high government spending, although private sector credit growth remains modest.

In its financial stability review, the central bank said it saw rising evidence that Qatar, an OPEC member, was recovering rapidly from last year's slowdown.

"In order to support the growth momentum, monetary policy would have to ensure the sustained flow of credit to the economy, particularly the non-hydrocarbon sector," the central bank said.

Qatar's real gross domestic product is expected to grow by 15.5 percent this year, up from 8.7 percent in 2009 but below 25.4 percent in 2008, a Reuters poll shows. Other Gulf oil states expect low single digit growth this year.

Bank lending to the private sector, which has slowed sharply after soaring 40 percent in January 2009, rose 3.1 percent in May from a year earlier, central bank data shows. (Reuters)

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