Unfortunately, cutting loan rates will just act to further boost liquidity, which is the last thing Oman needs right now. Excess cash, peg to weak dollar fuel Gulf inflation
CBO board cuts interest rates on personal loansTimes Of Oman article
Sunday, March 23, 2008 11:07:52 PM Oman Time
MUSCAT — The Central Bank of Oman’s board of governors yesterday held its first meeting of the year chaired by Dr Ali bin Mohammed bin Moosa, health minister and deputy chairman of CBO’s board of governors.
The board has reduced the interest rate ceiling on new personal loans offered by commercial banks operating in the Sultanate from 9 per cent to 8.5 per cent per annum starting from April 1.
It will also serve to slightly reduce the profitability of banks operating in Oman. Although given their stellar share prices lately, that doesn't seem a huge issue. Being able to borrow in dollars at circa 4% with zero (or even negative) exchange rate risk, and loan it out in rials at 9% (+ a multiplier) seems like a license to print money indeed. Although I assume, while the default rate is never publicized here, it must be relatively high. Oman is also still a country where people are expected to actually pay a fee to own a credit card, something I'm still not used to.
At the same time as its boosting liquidity via rates, the CBO is trying to mop up some liquidity via certificates of Deposit, aka Government bonds. CBO raises RO215m through CDs. They have also lately raised the amount of cash that banks have to hold, again to try and reduce liquidity somewhat.
The CBO seem to be doing everything they can, which is certainly better than nothing, but its unlikely to be enough, as it's all on the margin when compared to a domestic money supply racing away at ~30%+ growth. It's like bailing a leaky boat with a teaspoon.