Qatar, which has not yet responded to the liftoff of interest rate by the US Federal Reserve, can afford to wait in the short term, but will have to eventually reciprocate, which may slowdown the private sector that is increasingly becoming a growth engine for the country, according to experts.
“Given that consumer price index inflation is benign and strong growth has to emerge, especially from the non-hydrocarbon sector, conventional wisdom suggests continuing with an expansionary monetary policy (in the short term),” a banking source said.
Highlighting that the 2016 budget has itself spelt out the need for raising finance from domestic markets to plug the more than 26% decline in expected revenues; he said in such a scenario an interest hike would put additional burden on the exchequer.
Saudi Arabia, the UAE, Kuwait and Bahrain had increased interest rates, following the Fed’s decision to hike the rate by 25 basis points, after keeping it near zero for the last seven years.
“We might not need to increase the interest rates based on the liquidity and looking at our domestic environment,” Qatar Central Bank (QCB) Governor HE Sheikh Abdulla bin Saoud al-Thani had said in October.
An investment analyst, who tracks fixed income markets, said the QCB’s overnight deposit rate is lower than the US benchmark by 50 basis points despite the 0.25% hike in Fed rates.
“This, along with the accumulated comfortable buffers, could afford (the QCB to) delay a rate hike,” he said.
QCB’s policy rates such as QMR deposit rate stands at 0.75%, QMR lending rate at 4.5% and repo rate at 4.5%. The deposit and lending rates are announced by the QCB on overnight deposit and loan deals between it and local banks through Qatar Money Market Rate Standing Facility (QMR), respectively.
The Federal Open Market Committee projections suggest that the rate is expected to rise to about 1.4% by the end of 2016, suggesting four more increases over the coming 12 months. Qatar banking sources said in the long term, it will eventually prompt the QCB, whose monetary policies are linked to riyal’s fixed peg with dollar, to reciprocate.
The Ministry of Development Planning and Statistics, in its Qatar Economic Outlook 2015-17 Update, had said domestic interest rates in Qatar are likely to rise during 2015-17 on rising funding needs of government and the commercial banks and “accentuated” by the Fed liftoff.
“Over the outlook period, and in circumstances where oil and gas revenues have ebbed and public sector deposits in the commercial banking system have fallen, domestic interest rates are likely to feel upward pressure from rising funding needs of government and the commercial banking system, which must now comply with tighter regulatory standards,” the update had said.
Given the fiscal austerity measures currently being contemplated; the private sector, which ought to play a bigger role in the country’s growth story, will face more heat if the rates were to harden, sources said.
Considering that government plans to increasingly tap the domestic debt market and that the country has now elongated maturities for instruments, the sources said the time has come to systematically develop the corporate debt market, which could augur well for the infrastructure development in the country.