Oman will keep interest rates close to zero for the foreseeable future to prevent a further surge of liquidity into the Gulf country's banking system, the oil producer's central bank head said on Wednesday.

The Sultanate has been keeping the rate it uses for draining excess liquidity from the market at around 0.04 percent at its weekly auctions of deposit certificates, near the lower end of the US benchmark rate range.

"The interest rates will stay low because of excess liquidity in the banking sector," Central Bank of Oman executive president Hamood Sangour al-Zadjali told Reuters in a telephone interview.

Federal Reserve's benchmark overnight interest rates are expected to stay in a range of zero to 0.25 per cent for an extended period, but Fed policymakers offered divergent signals last week.

Oman lacks an independent monetary policy because like most of its fellow Gulf oil producers pegs its rial currency to the dollar to import low inflation from the overseas.

The non-OPEC member needs to keep its rates more or less in line with the Fed to avoid excessive pressures on its peg to the greenback, but can make adjustments to affect liquidity.

The Oman central bank drained 456 million rials ($1.18 billion) from the market in its Monday's CD auction at an average rate of 0.04 percent. Demand stood at 505 million rials.

The bank's repo rate, which it uses to inject liquidity into the system via purchases of deposit certificates or government bonds, stands at 2.0 per cent since May 2009.

Neighbouring Qatar has a much higher benchmark rate, which has attracted a flood of liquidity into its banking sector.

Zadjali also said he expected a double digit growth of bank credit this year after the government boosted spending in its 2010 budget as oil prices roughly doubled over the past year.

"I think there will be an expansion of credit and banks' balance sheet at no less than 10 percent this year," he said.
"This is due to extra funds from the government spending that create a huge demand for bank credit."

Oman raised its spending plan by 12 percent this year to finance a range of infrastructure projects. Credit provided by the country's commercial banks rose 6.2 percent last year compared with 2008.-Reuters