Central Bank of Jordan interest rate reduction will have minimal impact, economists say

AMMAN - Economists on Monday said the Central Bank of Jordan’s (CBJ) decision to lower interest rates on all monetary policy instruments by 50 basis points as of last Thursday will have “little impact” in light of the current global economic headwinds caused mainly by the coronavirus outbreak.

“The timing has become predictable — when the Federal Reserve System in the US lowers its interest rate, the CBJ expectedly follows suit,” Adel Bino, an economist and professor of economy at the University of Jordan, told The Jordan Times on Monday over the phone.

“The responsiveness of banks’ interest rates to monetary policy and its changes by the CBJ differs for loans and deposits,” Bino said, noting that usually, interest rates on deposits “are more sensitive to changes in monetary policy than interest rates on loans”.

When the CBJ reduces the interest rate on deposits, he noted, it tends to drop faster than when the interest rate is lowered on loans, as it usually takes some time until a change is reflected in that case.

Bino added that Jordanian deposits in JD or USD are “not expected to change” because the adjustment is equal for both currencies.

Under the latest decision, the interest rate on JD deposits dropped and the interest rate on bank lending is also expected to go down, according to Bino, who added that “this should reduce the cost of borrowing, thus promoting investments and consumption”.

If consumption is not transformed into investment, “not much can be expected from the changes to the monetary policy, but it could keep the foreign currency reserve stable”, he said.

For his part, Economist Husam Ayesh said that when the decision to lower interest rates is taken “out of compulsion” and “not because of a proper study of local economic conditions, it has the potential to be less positively impactful than expected, especially because it came at a time of global conditions that limit its benefits”.

“The CBJ should now study current economic needs, which could require more revisions of banking interest rates and further decisions to lower them, supporting the government’s economic stimulus plans and allowing the Kingdom to face the repercussions of regressed economic performance”, Ayesh suggested.

The economist said that the CBJ could conduct such a study in cooperation with other banking institutions, with the aim of lowering costs for investors and individuals, encouraging them to spend more either to invest or to consume.

“This would support the economic sectors that are currently facing difficult conditions in light of the global slow down in trade,” he concluded.