A change in Qatar’s exchange rate regime is very unlikely in 2010–2011, Samba Financial Group has said in a report.
On exchange rate peg, there could again be ‘some divergence’ between the policy needs of the US and GCC states, particularly this year when US policy is expected to remain highly accommodative, it said. But Samba’s researchers do not see any change in the exchange rate regimes until the introduction of a GCC single currency.
“This could still take some time to implement and, in the first instance at least, is also expected to maintain the peg,” the Samba report said.
It also does not see a shift in Qatar’s monetary policy this year.
Currently, Qatar’s Monetary Rates (QMR) are out of line with those of the US Federal reserve. The QMR deposit rate is currently 2% and the lending rate 5.5%, against the Fed Funds rate of 0-0.25%.
“Normally, under the exchange rate peg to the US dollar there would be only a small spread between rates. However, when the US Fed began to reduce rates in 2008, the Qatar Central Bank did not follow suit due to its concern over then soaring credit growth and inflation.
“Now that credit growth has slowed sharply and inflation turned to deflation, there could be scope to cut rates to bring them in line with the US.
“However, we do not see this happening as concerns remain over potential inflationary pressures: from the large increase in hydrocarbons revenues expected next year, the continuation of a strongly expansionary fiscal policy, and a weaker US dollar.
“Thus Qatar’s policy rates are expected to remain unchanged, with any eventual tightening in the Fed Fund rates left to reduce the current spread with the QMR,” Samba said.
In this context, the authorities will have limited tools to deal with any potential build-up of excess liquidity as occurred in 2007-2008, the report said.
“Changes in bank reserve requirements and issuance of certificates of deposit are an option. It is also possible that having established a yield curve for international debt markets, the authorities may also look to sell local currency bonds.
“In addition, a large proportion of the expected current account and fiscal surpluses are expected to be channelled into savings and investment abroad rather than pumped into the local economy,” Samba added.
On exchange rate peg, there could again be ‘some divergence’ between the policy needs of the US and GCC states, particularly this year when US policy is expected to remain highly accommodative, it said. But Samba’s researchers do not see any change in the exchange rate regimes until the introduction of a GCC single currency.
“This could still take some time to implement and, in the first instance at least, is also expected to maintain the peg,” the Samba report said.
It also does not see a shift in Qatar’s monetary policy this year.
Currently, Qatar’s Monetary Rates (QMR) are out of line with those of the US Federal reserve. The QMR deposit rate is currently 2% and the lending rate 5.5%, against the Fed Funds rate of 0-0.25%.
“Normally, under the exchange rate peg to the US dollar there would be only a small spread between rates. However, when the US Fed began to reduce rates in 2008, the Qatar Central Bank did not follow suit due to its concern over then soaring credit growth and inflation.
“Now that credit growth has slowed sharply and inflation turned to deflation, there could be scope to cut rates to bring them in line with the US.
“However, we do not see this happening as concerns remain over potential inflationary pressures: from the large increase in hydrocarbons revenues expected next year, the continuation of a strongly expansionary fiscal policy, and a weaker US dollar.
“Thus Qatar’s policy rates are expected to remain unchanged, with any eventual tightening in the Fed Fund rates left to reduce the current spread with the QMR,” Samba said.
In this context, the authorities will have limited tools to deal with any potential build-up of excess liquidity as occurred in 2007-2008, the report said.
“Changes in bank reserve requirements and issuance of certificates of deposit are an option. It is also possible that having established a yield curve for international debt markets, the authorities may also look to sell local currency bonds.
“In addition, a large proportion of the expected current account and fiscal surpluses are expected to be channelled into savings and investment abroad rather than pumped into the local economy,” Samba added.
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