DUBAI: Oman’s central bank may continue pursuing an accommodative monetary policy for an extended period and expects a pressure on the currency if inflation differential to the United States widened further, it said on Thursday.
The Arab Gulf oil producer needs to keep its monetary policy closely aligned with the United States due to its peg to the dollar to avoid excessive pressures on its rial currency.
The sultanate’s central bank now faces a challenge over how to support economic recovery while at the same time keep rising inflationary pressures at bay, it said in its annual report.
"Keeping in view the adverse international developments and fragile nature of global recovery, managing recovery in Oman has emerged as the major policy challenge in 2010," the bank said.
"The Central Bank of Oman may continue its accommodative monetary policy for an extended period," it said.
Oman has run an easier monetary policy since the last quarter of 2008 to help the oil-reliant economy face the global financial crisis.
The non-OPEC member has been keeping the rate it uses for draining excess liquidity from the market at 0.04-0.09 percent at its weekly auctions of deposit certificates, near the lower end of the US benchmark rate range.
The US Federal Reserve’s benchmark overnight interest rates are expected to stay in a range of zero to 0.25 percent for an extended period.
Oman’s central bank said it needed to closely watch inflation in the second half of the year as price pressures in the Gulf state may increase as commodity prices rise and economic recovery gathers pace globally.
Liquidity management would thus continue to play a pivotal role in balancing growth and price stability goals, it said.
"Given the sustained consumer demand, there is a potential threat to inflationary pressures in Oman in 2010 in case of sharp rise in commodity prices in the international markets," the central bank said.
"There would be pressure on exchange rate if the inflation rate differential between Oman and the US widens further," it said.
The sultanate has been pegging its currency to the greenback since 1973 with the parity unchanged at $2.6008 to the rial since 1986.
Oman’s inflation climbed to an 11-month high of 3.0 percent year-on-year in April as food prices and housing costs edged up US consumer prices recorded their biggest decline in nearly 1-1/2 years in May.
The central bank head has said he expected Oman’s inflation of 4-5 percent in 2010 due to imported price pressures and economic growth at around 6 percent.
Analysts polled by Reuters were forecasting inflation at 3.5 percent and gross domestic product growth of 4.0 percent this year, after 3.7 percent in 2009.
The bank also said downside risks to economic growth seem to have reduced with a stabilisation in oil prices, while the banking sector was sound and needed no capital injections. US benchmark crude moved below $75 a barrel on Thursday.