GIH on Qatari monetary policy

The Qatar Central Bank (QCB) regulates the monetary policy of the country and its policy is mainly aimed at maintaining the long-held peg between the Qatari riyal and the US Dollar.

Therefore, the bank would continue to adjust its discount rate in line with the Fed rates. As a result we do not foresee any increase in the Qatar Monetary rate (QMR) in the current year since the US interest rates are not expected to go up in the near future.

Since February 2001, the QCB has freed the Qatari banking system from all its interest rate policy restrictions. The banks in Qatar can now borrow or deposit with the QCB at the 'Qatar Monetary Rate' (QMR), which is determined by the QCB on a daily basis for amounts more than QR2.0mn.

Currently, the QCB's base rate stands at 1.3%. There could be some tightening of US Fed rates next year which should get depicted in the QMR also, but we do not expect the QMR to increase beyond 3.5% in 2004.

Broad money (M2) recorded a growth of 11.8% in 2002, after having recorded a small negative growth in 2001. But in the first half of the year 2003, the broad money supply grew by nearly 17% compared to first half of the year 2002.

During second quarter of the year 2003, broad money supply was at QR34,607.6mn compared to QR34,330.2mn in first quarter and on year-on-year basis it grew by 17% compared to last June (2002). The reason for the increase in liquidity could be traced back to the high oil and gas prices as well as the credit provided to the various large scale development projects.

The inflation in Qatar has been well under control in the last couple of years, though it is expected to pick up because of the weakening of the US dollar and other external factors. The inflation (as measured by the consumer price index) in the last five years has varied in the range of 2.9%-1%, with the inflation being the lowest in 2002 at 1%.

In 2002, apart from the housing and the medical services most of the other segments saw a deflation in their prices. The biggest decline in the prices was observed by the furniture and household items which saw their prices decrease by 5.3%.

The falling dollar could therefore increase the local currency prices of imported goods. This along with the strong domestic demand could influence the inflation in the current year, but the extensive system of subsidies and price controls in Qatar could continue to restrict the cost of key goods and services.

Therefore, we expect only a moderate growth in the inflation rate in the current year, ranging between 1.5%-2%.