Oman's central bank is likely to keep its policy stance accommodative to boost confidence in the non-oil sector, although inflation may rise due to government spending to rein in social tensions.

The Sultanate, hit by social unrest earlier this year, has been keeping a loose policy stance since early 2009 as inflation eased from the double-digit rates of the oil-boom year of 2008.

'The CBO may continue with the easy monetary policy for some more time so that confidence in the non-oil sector is strengthened to sustain reasonable growth in the medium term,' the central bank said in its 2010 annual report.

Oman lacks a fully independent monetary policy because, like most of fellow Gulf oil producers, its rial currency is pegged to the US dollar.

The central bank keeps the rate it uses for draining excess liquidity from the market at around 0.03 per cent at its weekly auctions of deposit certificates, near the lower end of the US benchmark rate range of zero to 0.25 per cent.

The small non-Opec oil producer needs to keep its rates more or less in line with the Federal Reserve to avoid excessive pressures on its $2.6 per rial peg, in place since 1986.

The central bank drained 385 million rials ($1 billion) from the market in Monday's CD auction at an average rate of 0.03 percent. Demand stood at 395 million rials.

The bank's repo rate, it uses to inject liquidity via purchases of deposit certificates or government bonds, has stood at 2.0 percent since May 2009.

The central bank also said it saw the potential threat of inflationary pressures, mainly in the second half of the year, with a recent increase in global food and commodity prices being a concern for Oman, which imports most of essential commodities.

'The CBO is closely monitoring the price situation in both domestic and international markets so as to take timely actions as and when required without jeopardising the growth momentum in the economy,' it said.

'At this critical juncture when the global price situation is unfavourable, profligate fiscal policy may contribute to a rise in domestic demand and thereby accelerate inflationary pressures in the economy,' it added.

Inflation in Oman remained at 4.1 percent year-on-year in April, well below a 13.7 percent peak seen in June 2008. Analysts polled by Reuters in March expected consumer price growth to stay at 4.1 percent on average in 2011.

'With high global commodity prices, a weak dollar, easy monetary policy and loose fiscal conditions, it makes sense that inflation will tick up,' said Liz Martins, senior MENA economist at HSBC in Dubai.

'However, at the same time, slowing growth and sluggish credit extension will mitigate against the levels we saw during the boom years,' she said.

Protesters demanding jobs and end to graft prompted Sultan Qaboos bin Said, a US ally who has ruled Oman for 40 years, to promise a $2.6 billion spending package in April. He also announced plans to create 50,000 new jobs among other measures.

The central bank said that the fiscal deficit may rise to 1.85 billion rials in 2011 due to the additional spending, from an 850 million gap originally planned, although robust oil prices may absorb some of the pressure.

Oman, promised to receive $10 billion in aid from wealthier Gulf neighbours, based its 2011 budget on an oil price of $58 per barrel. The US benchmark crude has been floating between $84 and $115 per barrel since January.-Reuters