The impact of bank loans and the interest rate on inflation in Oman

Abstract EN

The Maintaining of monetary stability and the fight against inflation is one of the main tasks of the Central Bank as inflation is one of the most important economic indicators.

Therefore, this paper discusses the impact of bank loans and the interest rate on inflation in Oman through quarterly data for the period 2001-2019, and to perform the standard statistical tests needed for "unit root testing”, ” Johnson Cointegration", "Causation Granger test", "VAR model".

The results of the Johnson Cointegration test showed that there is no long-term equilibrium relationship between (Bank loans, interest rates) and inflation.

Also, the result of the Granger causality test showed a causal relationship for one direction with significant statistical significance between Bank loans and inflation.

In addition to a weak effect at a significant level of 10% between the interest rate and inflation, Moreover, the results of the VAR test also confirmed a short-term relationship between bank loans and inflation, which is in line with the outcome of the Granger test.

The study concluded that Bank loans granted by Omani banks to different economic sectors affect inflation rates, So there is a need to review the rules of giving credit and encourage banks working to direct loans towards the areas of production and investment, not consumerism, as this contributes to lower inflation rates.