Fed’s quarter-point hike could squeeze GCC economies through two channels, Omani economist warns

An Omani economist, Azza al Habsi, posted an analysis on LinkedIn arguing Gulf economies face a "double tap" of monetary tightening following the Federal Reserve's 25 basis‑point rate increase on September 16, 2026. The two channels are: higher long-term US Treasury yields and policy-rate increases transmitted through GCC currency pegs to the dollar.

Then the Fed raised its target range to 3.75–4.00% on September 16. Most Gulf central banks subsequently lifted their benchmark rates because their currencies are pegged to the dollar. Kuwait was the main exception because its dinar is linked to a currency basket rather than solely to the dollar.

Complicating factors: supply shocks and local data

Her concern is sharper for the GCC because the region is facing an oil‑price shock plus disruptions to export routes. Higher oil prices may not translate fully into extra fiscal revenue if export volumes and shipping remain constrained. That raises the risk that higher interest rates will tighten domestic demand at the same time that supply constraints keep prices elevated.

Omani indicators make the picture mixed. Consumer inflation in Oman reached 3.4% year‑on‑year in August, with an average of 2.9% over the first eight months of 2026. Transport prices rose 8.5% and food and non‑alcoholic beverages rose 7%. At the same time, bank credit remained strong: total outstanding credit at conventional and Islamic banks increased 11.5% to RO37.4 billion at the end of May.

Pass‑through and the immediate test

Past tightening cycles in Oman showed that even large rises in policy and interbank rates produced only modest increases in average retail lending rates. The immediate test now is how much the higher repo rate feeds through into interbank rates, bank funding costs, deposit pricing and new or variable‑rate loans.

For policymakers in the Gulf the tradeoff is clear. Imported tightening via the dollar peg may be appropriate to anchor inflation expectations, but it risks slowing activity in economies where some inflation is supply‑driven by energy and trade disruptions. Al Habsi's analysis argues the region may need lower rather than higher rates if supply constraints persist and fiscal receipts fail to rise with oil prices.

Watch 10‑year US Treasury yields, the pace of policy moves by GCC central banks, bank funding costs and the degree of pass‑through to retail lending. In Oman specifically, monitor interbank rates, deposit pricing and lending growth to see whether the repo increase changes borrowing costs for households and businesses.