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CBO hikes repo rate again by 25 basis points to 5.5%

25 Mar 2023 By GULAM ALI KHAN

Muscat – The Central Bank of Oman (CBO) on Thursday increased its repo rate again by 25 basis points to 5.5 per cent, following the US central bank’s decision as Omani rial is pegged to the US dollar.

The rate increase was the same size as the CBO’s previous rate decision in early February.

However, the CBO again cautioned local banks not to increase lending rates for consumers as there is ample liquidity available in Oman’s financial system.

The CBO’s rate hike decision was made after the US Federal Reserve on Wednesday increased its key interest rate by another 25 basis points. The quarter-point increase, which was in line with expectations, lifted the Fed’s target range to 4.75-5.00 per cent.

The sultanate follows a fixed exchange-rate regime, and consequently its interest rates are closely aligned with US rates. The CBO’s repo rate generally moves in tandem with the Fed’s policy rate.

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

‘After the US Fed’s recent announcement to raise its key policy rate, the Central Bank of Oman increased its repo rate for local banks at the similar rate of 25 basis points to 5.5 per cent,’ the CBO said in a statement.

The CBO in its statement 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 key policy rate to 5.5 per cent in nine successive rate revisions in 2022 and 2023.

The global economy has witnessed rising and sustained inflationary pressure and central banks around the world are attempting to address this pressure by hiking interest rates.

In the Gulf region, most GCC countries raised their key interest rates by 25 basis points on Wednesday and Thursday, following the Fed’s decision. As most GCC countries keep their currencies pegged with the US dollar, their monetary policy is generally guided by US Fed policy decisions.

The GCC central banks have largely followed each rate hike by the US Fed over the last year as the US central bank fought to tame inflation with the most aggressive tightening cycle since the 1980s.

According to a Reuters report, the Saudi Central Bank on Wednesday raised its repo and reverse repo rates by 25 basis points each to 5.5 per cent and 5 per cent, respectively. The Central Bank of the UAE also raised its base rate by 25 basis points to 4.9 per cent.

The Central Bank of Qatar increased its deposit, lending and repo rates by 25 basis points to 5.25 per cent, 5.75 per cent and 5.5 per cent, respectively. The Central Bank of Bahrain also raised its rates by 25 basis points on Wednesday, including its key policy rate on its one-week deposit facility, according to the Reuters report.

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