CBO has cautioned local banks not to increase cost of borrowing for consumers as there is sufficient liquidity available in Oman’s financial system

Muscat – The Central Bank of Oman (CBO) on Thursday raised its repo rate for local banks by 75 basis points to 3.75 per cent, moving with US Federal Reserve as Oman’s currency is pegged to the US dollar.

However, at the same time, CBO has cautioned local banks not to increase lending rates for consumers as there is sufficient liquidity available in Oman’s financial system.

Oman’s rate hike decision was made after the US Fed on Wednesday increased its key interest rate by 75 basis points, the fifth rate hike this year.

Oman follows a fixed exchange-rate regime, and consequently its interest rate is closely aligned with US rates. As a result, CBO’s repo rate increases in tandem with the Fed’s policy rate.

Repo rate is the policy rate that allows commercial banks to borrow short-term liquidity from CBO as the lender of last resort.

‘The Central Bank of Oman has increased its repo rate for local banks by 75 basis points to stand at 3.75 per cent. The move comes after the US Federal Reserve’s announcement to hike its key policy rate,’ CBO said in a statement.

US Fed on Wednesday rolled out another steep increase in the key US interest rate and said more hikes are coming as part of the battle to rein in soaring inflation – an aggressive stance that has raised fears of a recession.

It was the third consecutive increase of 0.75 percentage point by the Fed’s policy-setting Federal Open Market Committee, continuing the forceful action that has included five hikes this year. The new increase takes the Fed policy rate to the range of 3.0-3.25 per cent.

CBO said that its monetary policy target is to sustain and maintain its fixed exchange rate. This policy is aligned with the structure and nature of the Omani economy.

‘There are a number of advantages for Oman that are derived from this policy, namely ensuring the stability of the Omani rial, mitigating capital outflow and promoting certainty among investors by removing exchange rate risk,’ the sultanate’s central bank said in its statement.

Following the lead of the Fed, Oman has raised its policy rate to 3.75 per cent in five successive rate revisions this year.

As the GCC states keep their currencies pegged to the US dollar, other GCC central banks also lifted their policy rates by mostly 75 basis points on Wednesday and Thursday.

As per a Reuters report, Saudi Arabia’s central bank, known as SAMA, raised its repo and reverse repo rates by 75 basis points to 3.75 per cent and 3.25 per cent, respectively. The UAE’s central bank also hiked its base rate by 75 basis points to 3.15 per cent.

Qatar and Bahrain also said they were increasing their main rates by 75 basis points. Kuwait, which pegs its currency against a basket of currencies that includes US dollar, increased its key discount rate by 25 basis points to 3.0 per cent, as per Reuters report.

The global economy is witnessing rising and sustained inflationary pressure and central banks in many countries are attempting to address this pressure by hiking interest rates with the objective of reducing lending and by default reducing aggregate demand that in turn would translate in reduced consumption.

‘While higher interest rates are expected to lead to lower inflation, in some cases, as related to consumers in high-income brackets, they could result in higher savings,’ CBO said in its statement.