ammonnews.net

BY Adli Kandah

The Federal Reserve raised interest rates by twenty-five basis points, and by eight votes to one; who preferred that the interest rate should be increase d by fifty basis points, without any objection from any of the members on the issue of raising interest rates.

If I were a member of the Open Market Committee of the Federal Reserve, I would vote for a 50 percentage point hike in interest rates, not 25 points, at least this time. This is because inflation is too high and far from the Fed's 2 per cent target. But I know that the Fed is pleased with the performance at the macroeconomic and labour market levels and does not want to send a strong negative signal by raising interest rates at a high rate and wants the rise to gradual.

Indicators of economic activity and employment have been continuing to improve in the United States, and job gains have been strong in recent months, and the unemployment rate has fallen dramatically to reach only 3.8 per cent, which is lower than the natural unemployment rate, which indicates that the economy is operating at its maximum capacity. However, the inflation rate remains high, and has been further exacerbated by the pandemic-related supply and demand imbalances, higher energy prices and broader price pressures.

Many central banks that link their currencies to the US dollar followed the decision of the Federal Reserve. They raised their interest rates, and the Central Bank of Jordan was no exception in this regard, it raised interest rates on all its monetary policy instruments by a quarter of a percentage point, although indicators of economic activity employment and inflation are not similar to those of the States. What were the justifications that prompted the Central Bank to take the decision to lift interest rates, unanimously within the Open Market Committee?!

The main justification is the linkage of monetary policy in Jordan with the policy of the Federal Reserve, given that the Jordanian dinar has been linked to the US dollar at a fixed exchange rate since 1995. Therefore, interest rates in Jordan must move in the same direction as interest rates in the United States, regardless of the trends of indicators of economic activity locally, in defence of the exchange rate policy first, which is an essential component of monetary stability. Thus, the Central Bank of Jordan has sent a strong message to investors, depositors and expatriates that its main goal is to defend the fixed exchange rate by keeping the interest rate margin between monetary instruments in dinar and dollar, in favour of the dinar, and also keeping the interest margin on the dinar higher than its levels in the region.

And what it did was well. This is because the main objective of the Central Bank, as entrusted to it in its law since 1971, is to maintain monetary stability in the Kingdom, ensure the convertibility of the Jordanian dinar, contribute to banking and financial stability, and then contribute to encouraging steady economic growth.

The Central Bank of Jordan, with its notional independence, sided with its main mission, sending a strong message that it would keep the exchange rate stable and backed by huge foreign reserves that exceed $18 billion and cover more than nine months of imports. This is a strong indicator in favour of the dinar exchange rate, and the central bank can intervene comfortably in the money market if it is forced to do so.

The most obvious and immediate effects of an interest rate increase come through its effect on income from interest-bearing accounts and on debt repayments, such as mortgages and credit cards, at variable interest rates. It is expected that the change in interest rates will not necessarily pass immediately or completely to a change in the interest paid on savings accounts and the interest rates charged on loans, as these accounts and those loans are linked to a specific term and the increase in interest on them will be reversed when their terms become due, if the banks decide so.

As for the effects of high interest rates on investment and economic growth, and thus unemployment, it will be marginal at this stage, and a parallel move is required on the part of fiscal policy to combat price hikes for some commodities in the market, and to encourage investment and stimulate economic growth. Reducing or canceling tax rates on some commodities is a tool in the hands of the Ministry of Finance, and setting ceilings on the prices of some other commodities is also another tool in the hands of the Ministry of Industry and Trade, and it is used on the prices of live chickens last week, and most important of all is the control over the markets.