Rial peg to dollar is under no threat: CBO

05/09/2016 07:42 AST

The Omani rial peg to the US dollar will continue and there is no need at present for any alteration thanks to financial stability. “The difference between the domestic interest rate and the federal rate is very small, and as long as there are high US dollar reserves, the peg to the US dollar is under no threat at the time being”, the Central Bank of Oman (CBO) confirms. According to the apex bank, a relatively lower interest rate during in 2016 is good for the recovery of the non-oil real GDP sector. As long as the peg remains intact, credibility of monetary policy also remains high.

CBO’s Executive President Hamood Sangour al Zadjali in the first quarter of this year ruled out any intention of altering the country’s currency peg. “Nothing changed. We are committed to the peg with the USD. The interest rate hasn’t changed,” he said.

Interest rates in Oman have been steadily and slowly increasing, but by a very small amount above the US Federal fund rate. The increase reflects the increase in demand for liquidity. According to the CBO, “this trend shows that perhaps there is no need for the CBO to intervene in any way to push interest rate up since the market has been increasing the lending or borrowing rate above the US rate already”.

The interest rate policy in Oman is implemented via sustaining the peg with the US dollar. This is done by managing liquidity.

“It makes sure that there is an adequate quantity of US dollar reserves such that, given the amount of rial available, the exchange rate is fixed at a rate equal to 0.3845”, the apex bank points out in a report.

The CBO, however, also has a corridor where the short-term interest rate fluctuates within. This corridor has a borrowing/lending rate equal to 1 per cent or LIBOR plus 50 basis points, whichever is higher, hence 1 per cent.

The deposit rate is determined by the certificate of deposit rate, which is about 0.1 per cent. It may be noted that this deposit rate is no longer available. Similarly, banks do not want to borrow at a rate higher than the CBO’s 1 per cent rate, and do not want to deposit elsewhere at a rate lower than 0.1 per cent.

“Therefore, the overnight interbank rate must be fluctuating within these two limits”, says the report.

However, the CBO cannot set an overnight interest rate like the Fed because the exchange rate peg to the US dollar requires the short term interest rate be equal (over very close) to the US federal fund rate, the report says The overnight interbank interest rate is determined by the demand and supply conditions in Oman and tied to the US federal fund rate.

The CBO does not set this rate. Because of the peg, this rate must be set with reference to the US federal fund rate.

Oman Daily Observer