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Excess liquidity and interest rates

May 18,2022 - Last updated at May 18,2022

The Central Bank of Jordan (CBJ) raised interest rates on all of its monetary tools in response to developments in the regional and international markets, and in line with the decision of the US Federal Reserve and the rest of the regional and global central banks that raised their interest rates to combat the wave of price hikes currently taking place in global markets.  The CBJ’s decision to raise interest rates comes to maintain monetary stability, which is its first task in accordance with the law, and this is by maintaining the interest margin in favour of the dinar instruments compared with interest rates in the region and the world.  Support local economic growth.  On the other hand, the decision comes to combat the expected rises in prices witnessed by the economy, albeit not at the same global levels, all because interest rates represent one of the central banks’ weapons in curbing inflation, by absorbing liquidity surpluses from the economy and undermining demand, and given that the main task what central banks aspire to do is to maintain price stability, so there is no escape from taking this proactive step.

The interest margin between the dinar instruments and the rest of the foreign currencies has been adopted and monitored for years by the CBJ and ranges between 2 and 2.5 per cent in favour of the Jordanian dinar.

In the normal situation, raising interest rates means that the central bank will take a higher interest than the banks that resort to it as a lender of last, and in return, it will offer them a higher interest rate on their deposits with it.  But in the current reality, the CBJ has two large programmes to finance investment projects in the largest ten economic sectors, with a volume of 1.3 billion dinars, part of which was exploited during the Corona pandemic, and there are still 600 million dinars available and ready for lending, and there are about 700 million dinars available.  It is ready to lend to small and medium-sized companies at very low interest rates, and there is about 5 billion dinars in excess liquidity available with the banking system and deposited with the CBJ, which is also ready for lending.  So there should be no concern about liquidity or high interest rates. Given the existence of such programmes, it will have a positive impact on economic growth.

The CBJ has carried out its duty in accordance with the powers entrusted to it by law to maintain monetary stability and maintain the attractiveness and strength of the dinar, which is a prerequisite for economic activity, stimulating local investment and attracting foreign investments.  

The ball is now in the court of investors, businessmen and entrepreneurs to put forward feasible and bankable economic projects to use the cash available at the banking system and the Central Bank, whose size exceeds 6 billion dinars, including the funds of the CBJ programmes as mentioned above.

As for the consequences for individuals, depositors will benefit, in turn, the potential hikes in interest rates on new loans will be governed by the volume of demand for credit, and they are not expected to be large, given that interest rates were reduced during the Corona pandemic by large percentages.  And the levels of domestic interest rates did not reach their levels before the Corona pandemic, as the weighted average of interest rates on term deposits reached 3.53 per cent and on loans and advances 6.95 per cent in February 2022, compared to 4.92 per cent on time deposits and 8.46 per cent on loans and advances in 2019.

 As a result, it is expected that the business or economic cycle will take its natural course, and we hope that it will have a positive impact on the work environment, employment, production and growth rates.

 Since we are talking about an integrated economy, this calls for resorting to other economic tools on the part of the government to stimulate investment, the private sector and partnership projects between the public and private sectors, especially since interest rates are not the only factor in influencing investment and economic activity.

 

The author is a board member of Jordan Deposit Insurance Corporation.

 

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