Following the US Federal Reserve’s recent decision to set interest rates within the range of 5.25-5.5 percent, attention has now shifted to the Central Bank of Kuwait since the Kuwaiti central bank has adopted a gradual approach in determining local interest rate trends, diverging from its historical practice of aligning closely with the Fed’s path, reports from Al-Rai daily.
As of now, the local monetary policy maker has not provided any new signals regarding its interest rate trajectory, whether in the immediate future or until the year’s end. Speculation is growing about the Federal Reserve potentially raising interest rates once or twice by the end of the year.
Various scenarios prompt the recurring question: What will be the impact of interest rate trends on banks, the stock market, companies, and individual consumers? Generally, there exists an inverse relationship between interest rates and stock markets. When interest rates increase, stocks tend to decline, and deposits and bonds become more attractive.
Higher interest rates also elevate the cost of borrowing for investors. If investors opt to reduce their borrowing despite their needs, both their liquidity levels and investment volumes decrease, applying pressure on stock prices. Conversely, when interest rates decrease, the opposite occurs.
In the banking sector, financial institutions seek to increase the discount rate. For local banks in Kuwait, every quarter-point rise in the interest rate translates to an accounting-based increase of approximately 60 million dinars in their quarterly profits, in comparison to unofficial expectations.
Thus, bank officials typically prefer to align with Kuwait’s approach of globally increasing interest rates. This strategy reduces their cost of funds compared to the operating returns they receive from the continuous rise in interest rates. It’s a move away from fixing the discount rate and instead directing efforts towards raising interest on deposits while increasing the Central Bank of Kuwait’s intervention to manage banking surpluses.
For companies, when central banks opt to raise the discount rate, borrowing costs escalate, especially in the short term. This has a multiplier effect on all other borrowing costs for companies and consumers in the economy. As borrowing money becomes more expensive due to high interest rates, institutions often pass on these costs to their customers, affecting individual consumers through higher interest rates on credit and a reduction in discretionary spending.
When consumers have less disposable income, corporate revenues and profits decline and individuals experience varying impacts of the interest rate increase — some benefiting from high-yield deposits due to their available liquidity, while others are compelled to cover their financing needs at a higher cost due to the same interest.
Regarding the rationale behind central banks raising interest rates, this move is typically employed to manage inflation. By increasing interest rates, the money supply available for purchases is effectively reduced, making it more costly to obtain money. Conversely, lowering interest rates increases the money supply, encouraging spending.
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