Monetary Policy Transmission in Oman
Selected Issues Papers, June 13, 2024
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- Monetary Policy Transmission in Oman
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Bibliographic details
- Authors: Thomas Kroen
- Published: June 13, 2024
- Series: Selected Issues Papers
- DOI: https://doi.org/10.5089/9798400278358.018
Key findings
- Oman’s policy rates move closely with US monetary policy amid a pegged exchange rate to the US dollar and an open capital account.
- Empirical analysis shows transmission from policy rates into effective lending and deposit rates remains subdued in Oman, even compared to GCC peers facing a high oil price environment with persistent excess liquidity in the banking system.
- A cap on personal loan rates and low exposure of banks to SMEs and riskier borrowers limit passthrough into effective lending rates and credit conditions.
- The note documents ongoing actions by Omani policymakers to strengthen transmission.
Transmission mechanisms and constraints
- Exchange rate regime and capital account openness: peg to the US dollar + open capital account → close alignment of Oman’s policy rates with US monetary policy.
- Banking system characteristics:
- Persistent excess liquidity in the banking system reduces sensitivity of effective lending and deposit rates to policy rate changes.
- Low bank exposure to SMEs and riskier borrowers constrains transmission to broader credit conditions.
- Regulatory constraints:
- A cap on personal loan rates acts as a binding constraint on passthrough into effective lending rates.
Policy recommendations
- Strengthen liquidity management to reduce persistent excess liquidity and improve responsiveness of market rates to policy rate changes.
- Enhance reserve management to support more effective transmission from policy rates to market rates.
- Consider relaxing or removing the interest rate cap on personal loans to allow more complete pass-through of policy rate changes into effective lending rates.
Supplementary observations
- The analysis is presented as a Selected Issues Paper by Thomas Kroen, dated June 13, 2024.
- The paper emphasizes comparisons with GCC peers operating under similar oil price and liquidity environments and focuses on the interplay of policy rate setting, regulatory constraints, and bank balance-sheet exposures.
International Monetary Fund — Selected Issues Paper No. 2024/018
Content in this bundle
- Monetary Policy Transmission in Oman; Selected Issues Paper No 2024/018; December 14, 2023