Dollar Peg Weighs Heavily on Jordan's Interest Rate Decisions
The Jordanian economy is facing significant challenges due to its pegged exchange rate with the US dollar. Economists and columnists are debating whether maintaining a high interest-rate differential between the dinar and the dollar is necessary for economic stability.
Dr. Yousef Mansour argues that while the Central Bank of Jordan's monetary policy is closely linked to US Federal Reserve decisions, it does not necessarily mean that Jordanian interest rates must move in line with US rates. He points out that a recent International Monetary Fund study found that the response of Jordanian interest rates to changes in US interest rates was less than one-for-one.
Mansour suggests that the Central Bank retains some room to take domestic economic conditions into account when setting monetary policy, and proposes reaching the 'lowest sufficient interest rate' needed to protect the dinar, exchange rate, and foreign reserves. He notes that improvements in several monetary and economic indicators, such as a 2.93% real growth rate and 2.2% inflation rate, warrant reassessing the size of the interest-rate differential.
Issam Qadamani approaches the issue from a different perspective, focusing on the direct effects of the dinar's link to the US dollar. He argues that maintaining a comfortable interest-rate differential between the dinar and the dollar is essential for preventing savings and deposits from shifting into dollars and preserving the attractiveness of the local currency.