Oman inflation accelerated for a seventh straight month to a 16-year high of 8.29 per cent in December as the weaker dollar-pegged rial drove up food costs, raising pressure on the central bank to fight rising prices.

Food, beverage and tobacco costs - which account for almost a third of the consumer price index - surged 14.4 per cent, the ministry of national economy said in a statement.

Food costs had risen 12.6 per cent in November. "It is not surprising to see these figures given that food is an exchange-rate related item," said Giyas Gokkent, head of research at the National Bank of Abu Dhabi. "At the end of 2007 in particular we saw dollar weakness," he said. 

Like other Gulf states, except Kuwait, Oman's dollar peg forces it to track US monetary policy at a time when the Federal Reserve is slashing interest rates to ward off recession.

In contrast, Gulf economies are surging on a quadrupling of oil prices during the last six years, fuelling inflation. A weaker Omani rial contributes to about a fifth of domestic inflation, Oman's Central Bank Governor Hamood Sangour al-Zadjali told Reuters last week.

The US dollar hit record lows against the euro and a basket of major currencies in November. It has recovered slightly since, but still remains about 10 per cent lower than it was this time 12 months ago.

In 2006, only 5.2 per cent of Oman's imports were from the United States, while 17.3 per cent were from Japan, 5.1 percent from Germany, 5.3 percent from India and 3.4 percent from Britain, according to central bank data.

The consumer price index climbed to 116.3 points on Dec.31, compared with 107.4 points a year earlier, the ministry said.

Rents, which account for about 15 percent of the index, rose 11.1 per cent in the economy of almost $36 billion - steady against the rate of increase in November.

As interest rates fall, the central bank has tried to mop up liquidity by selling more certificates of deposit and raising bank reserve requirements twice since August to 5 percent, Zadjali said.

It could increase the proportion of funds banks must keep in their vaults again this year to offset the effect of lower borrowing costs on inflation, he added.

"These are essentially bandage solutions," Gokkent said. "They cannot really go to the root of the problem. The exchange-rate element will become more important going forward."

Oman has ruled out revaluing its currency or dropping its peg to the dollar any time soon because the weaker rial helps attract foreign investment and encourage exports, Zadjali said.

In the meantime, Oman's ruler ordered on Saturday an increase of up to 43 per cent in state workers' wages and a wheat price subsidy of 25 rials ($64.95) per tonne - measures that could spur further inflation, Gokkent said.-Reuters