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Abu Dhabi, UAEWednesday 19 December 2018

Oman inflation to rise in 2019 as economy grows

Fitch Solutions says Oman’s benchmark rate will increase to 3.8% by end of 2019

Sultan Qaboos bin Said, the ruler of Oman, whose economy is forecast to grow as interest rates rise, according to Fitch Solutions. Agencies
Sultan Qaboos bin Said, the ruler of Oman, whose economy is forecast to grow as interest rates rise, according to Fitch Solutions. Agencies

Oman’s economic growth will accelerate to 3.1 per cent in 2019, up from 2.6 per cent this year, while inflation rises as the sultanate ramps up benchmark interest rates in line with the US Federal Reserve, according to a report.

“While the stronger growth will come in part due to increased oil production, we expect activity in the non-oil economy will also accelerate on the back of rising government spending, feeding through to stronger business and consumer confidence,” the report by Fitch Solutions, part of the Fitch Group, said.

Inflation is expected to accelerate to an average of 2.8 per cent in 2019, up from one per cent in 2018. Fitch said it revised downwards its initial forecast for 2018 of 1.3 per cent due to declining housing and global food prices.

Oman, the biggest Middle East oil producer outside Opec, is benefitting from an increase in output in line with the oil cartel's decision to ramp up production since May. Oman is part of the Opec + alliance, which was struck in 2016 to help control global oil production.

The sultanate plans to introduce a 5 per cent VAT in 2019, and the country’s interest rate is expected to react similarly to that of the UAE and Saudi Arabia. Both countries saw rising rates and inflation after implementing VAT in January this year.

“With growth and inflation both picking up in 2019, we see little to disincentivise the Central Bank of Oman from raising its benchmark policy rate,” Fitch added in the report.

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It said Oman’s benchmark policy rate is expected to rise to 3.8 per cent by the end of the year, from 2.8 per cent now, following around 75 basis points worth of increases in the year to date.

The Fed is expected to raise rates for the fourth time this year when it meets in December. All Arabian Gulf countries mimic Fed rate increase because of their currencies' peg to the dollar, excluding Kuwait, which links its dinar to a basket of currencies.

The continued increases mirror the Fed’s monetary policy tightening cycle, as the sultanate aims to keep its current currency peg to the US dollar to maintain price stability and shore up investor confidence.

“We believe the timing of Oman’s hikes will come in tandem with the Fed hike to minimise pressure on the peg in the context of diminishing foreign exchange reserves, which fell to $16.1bn in 2017, from $20.3bn in 2016," it said.