Muscat – Despite the growing global inflationary pressures, inflation outlook in Oman remains moderate and does not pose any imminent concern for financial stability in the sultanate, according to the Central Bank of Oman.

Supply chain constraints, rising food and energy prices have further exacerbated the global inflationary outlook, CBO noted in its Financial Stability Report 2022 which was released on Sunday.

‘The geopolitical tensions in Europe along with the recovery in demand after the COVID-19 pandemic have contributed to the rise in commodity prices which led to rising inflationary pressures,’ the report said.

The inflation outlook in Oman, as per CBO, remains moderate as the inflation expectations for over half of the consumer basket remain low. Moreover, the higher hydrocarbon revenues have provided more fiscal space to the government for targeted intervention [subsidies] to offset any inflationary pressures to complement monetary actions taken by CBO.

The sultanate’s central bank said that the gains from higher oil prices have dwarfed the inflationary pressures, adding that moderate inflation does not pose any imminent concern for financial stability in Oman.

‘Unlike in many other economies where property prices and rents grew at record rates during the pandemic, the property prices in Oman fell in 2020 due to a decline in population and stabilised in 2021,’ CBO said.

It said due to ample supply, housing costs in Oman are not expected to rise sharply in the near term. Moreover, the prices of utilities (water, gas, electricity) are administered, the price of fuel for the year 2022 has been capped at the October 2021 level, and the communication sub-index has been almost flat though slightly declining for almost a decade.

‘Considering this, although landed cost of some food items in particular grains and edible oil will contribute to higher prices, the inflation will remain benign for over 50 per cent of the consumer basket’, CBO said.

Policy rate increases

Commenting on recent interest rate hikes by many countries to fight historically high inflation, CBO said that the needed monetary policy tightening by major central banks to meet their medium-term inflation target may hinder growth and setback the global recovery process.

Following the US Fed’s hikes in interest rate, CBO revised its policy rate upward.

Oman follows a fixed exchange-rate regime, consequently its interest rate is closely aligned with the US target federal funds range. As a result, repo rate in Oman increased in tandem with the US Fed’s policy rate.

To tackle the mounting inflationary trends, the US Fed revised its benchmark interest rate thrice during 2022, by 25 basis points in March, 50 basis points in May, and 75 basis points in June 2022, raising the rate to a range of 1.5-1.75 per cent. This prompted Oman to also raise its repo rate to 2.25 per cent by mid-June 2022 in three successive rate revisions.

The CBO noted that the current changes in policy rate have not yet reflected in the retail interest rates in the sultanate.

‘Increasing policy rates have not yet translated into an increase in retail rates as banks can absorb a moderate increase in policy rates. Nevertheless, a further tightening of the policy stance may raise the borrowing costs in Oman,’ CBO said in the report.

The Central Bank of Oman’s tenth issue of the Financial Stability Report stated that the risks to financial stability have subsided in Oman. ‘Nevertheless, new vulnerabilities have appeared that may test the resilience of our financial system.’

The report added that the banking sector retains the capacity to absorb a variety of shocks without adverse spillover effects on credit supply and the real economy.