Fed hike risks dual tightening across GCC, economist says

MUSCAT: Gulf economies risk facing tighter financial conditions through two channels at once: a sharp increase in long-term US Treasury yields and higher policy rates transmitted through regional currency pegs, according to an Omani economist.
Azza al Habsi, Vice-President for Economic Research and Emerging Trends at Ominvest, said the combination could deliver what she described as a “double tap” to the economy.
Al Habsi made the comments on her personal LinkedIn account. The post was presented as her own analysis and not as a statement by Ominvest.
Official US Treasury data support the central figure behind her argument. The yield on the 10-year Treasury stood at 4.19 per cent on the first trading day of 2026 before reaching 5.01 per cent on September 16, the day of the Federal Reserve’s decision.
That represented an increase of about 82 basis points before the latest policy move. The yield subsequently eased to 4.94 per cent on September 17.
Long-term bond yields and central-bank policy rates affect different parts of the financial system and should not be added together as a single rate increase. However, both can tighten financial conditions by increasing government, corporate and banking funding costs.
The Federal Reserve raised its target range by 25 basis points to 3.75–4 per cent on Wednesday. The unanimous decision was its first increase since July 2023.
The Fed said US economic activity was expanding at a solid pace but inflation remained elevated. It said the increase would support a timelier return to its 2 per cent inflation objective.
Most GCC central banks subsequently raised their benchmark rates because their currencies are pegged to the US dollar. Kuwait is the principal exception, as the dinar is linked to a currency basket rather than solely to the dollar.
The Central Bank of Oman raised its repo rate by 25 basis points to 4.5 per cent, effective September 17. Under the CBO’s published framework, the repo rate is calculated from the upper limit of the US federal funds target range plus a spread of 50 basis points.
Al Habsi questioned whether further rate increases could effectively address inflation generated by disrupted supplies. She asked how an additional 25 or 50 basis points would prevent supply-driven inflation from feeding into underlying prices.
She suggested the Fed’s action might instead be intended to reinforce its inflation-fighting credibility and create room to reduce rates more aggressively if economic growth deteriorates.
The concern is sharper for the GCC, she argued, because higher borrowing costs are arriving alongside an oil-price shock and disruption to regional export routes. Higher oil prices may not translate fully into increased fiscal revenue if export volumes and shipping flows remain constrained.
She concluded that many regional economies could need lower rather than higher interest rates.
The available Omani indicators, however, make the domestic picture more complicated.
Consumer inflation reached 3.4 per cent year on year in August, while average inflation during the first eight months of 2026 stood at 2.9 per cent. Transport prices increased 8.5 per cent and food and non-alcoholic beverages rose 7 per cent.
Bank credit also remained strong. Total outstanding credit extended by conventional and Islamic banking institutions increased 11.5 per cent to RO37.4 billion at the end of May.
The CBO said its increase would help maintain monetary and financial stability, contain inflationary pressure, limit undesirable cross-border capital movements and reduce exchange-rate risks.
Previous experience nevertheless suggests that the increase may not pass fully into household and corporate borrowing costs. During the earlier tightening cycle, the CBO found that substantial increases in policy and interbank rates produced only a modest rise in average retail lending rates.
The immediate test for Oman will therefore be how far the higher repo rate feeds into interbank rates, bank funding costs, deposit pricing and new or variable-rate loans.
The wider question is whether monetary tightening imported through the currency peg is appropriate for domestic economic conditions when part of the inflationary pressure originates from energy prices and disrupted supply rather than excessive local demand.