GCC Economies Face Dual Tightening Risk from Fed Rate Hike

Oman's economy is facing a unique challenge as it navigates the impact of the Federal Reserve's interest rate hike. According to Azza al Habsi, Vice-President for Economic Research and Emerging Trends at Ominvest, the combination of higher US Treasury yields and regional currency pegs could deliver a 'double tap' to the economy.

The 25-basis-point increase in the Fed's target range, from 3.75-4% to 4%, may seem minor, but its effects are being felt across the Gulf Cooperation Council (GCC). The Central Bank of Oman raised its repo rate by 25 basis points to 4.5%, effective September 17.

Al Habsi questioned whether further rate increases could effectively address inflation generated by disrupted supplies. She pointed out that an additional 25 or 50 basis points may not prevent supply-driven inflation from feeding into underlying prices, and suggested the Fed's action might be intended to reinforce its credibility and create room for more aggressive rate cuts if economic growth deteriorates.

The GCC is particularly vulnerable due to higher borrowing costs arriving alongside an oil-price shock and disruption to regional export routes. Al Habsi noted that higher oil prices may not translate fully into increased fiscal revenue if export volumes and shipping flows remain constrained.