Interest rate hike triggers debate among economists

AMMAN – The Central Bank of Jordan's (CBJ) recent decision to increase the interest rate once again in less than one month has triggered a debate over its impact, with economists split between its possible negative effect on investment flow and maintaining monetary stability.

Starting Sunday, March 19, the main interest rate and the interest on finance policy tools will be raised by 25 basis points, following a decision by the CBJ's open market operations committee. 

The decision was taken in line with the regional and international monetary markets' interest rates changes, to preserve the financial and monetary stability of the Kingdom including the stability of prices, the bank stated.

While officials have said that raising the interest rate is meant to increase the attractiveness of deposits in dinar, economists retorted that it would increase the prices of products and services and negatively affect investments. 

“The hike in interest prices affects the borrowing and lending activities, resulting in higher prices of goods and services because the interest rate is a main factor that influences the cost of money,” Ad-Dustour’s economist Khaled Zubaidi told The Jordan Times on Saturday.

While noting that the CBJ’s decision was made one day after the US Federal Reserve raised its benchmark interest rate, he said that the Jordanian dinar enjoys a “comfortable” interest margin, which could have given the Jordanian bank several months to change its interest rate.  

“The central bank should have postponed opting for a higher interest rate for at least a few months. Commercial banks will abuse the new interest rates and automatically increase them without going back to their customers. This is legal according to the banks’ adhesion contracts,” said Zubeidi. 

He added that investments would be “hit hard” by the decision, especially at this time of economic difficulty. 

While economist Zayan Zawaneh agreed on the “harmful impact of the new interest rates on investments”, he noted that the CBJ had no other choice but to raise them. 

“For the first time, the central bank increased the interest rate out of fear. The government’s decision to increase prices has resulted in higher inflation rate and it had to do something about it,” he told The Jordan Times, citing the Department of Statistics’ figures showing an acceleration of the inflation rate to 4.6 per cent in February.   

The second increase in interest rate, said Zawaneh, came as a direct response to the US central bank’s decision to increase the benchmark interest rate a quarter of a percentage point. “Three Gulf countries followed suit,” he noted.

This is exactly why the decision was the right thing to do, said economic analyst Youssef Damra, head of the business department at Al Ghad daily.

He explained that banks in other countries are offering higher interest rates on savings in national currencies, a situation that might tempt depositors to move their money to these countries.

“It is the job of the CBJ to promote monetary stability, and it has so far been very successful in that. This is an undeniable fact,” he told The Jordan Times.

On the impact on investment promotion, he said that the interest rate is only one factor that affects the flow of capitals to Jordan, but “everybody knows that the problem with investments in Jordan has so little to do with interest rates”. 

“Look at the bright side,” Damra concluded, “Jordanians, and others, will keep their savings in Jordanian banks and in the national currency. This means availability of liquidity for borrowers and stability for the dinar”.