Jordan Dinar's Interest Rate Premium Under Review Amid Strong Economic Fundamentals

The Jordanian dinar's relationship with U.S. interest rates has been a crucial aspect of monetary policy since its peg to the dollar in 1995.

When the Federal Reserve raises interest rates, the Central Bank of Jordan (CBJ) faces a dilemma: whether to match the increase to preserve the dinar's attractiveness or adjust according to domestic economic conditions.

A study by the IMF found that Jordanian interest rates responded less than one-for-one to U.S. rate movements, indicating that the CBJ retains some monetary policy space despite the exchange-rate peg.

The warranted interest-rate differential is a key concept in understanding this relationship, representing the minimum differential between Jordanian and U.S. interest rates justified by foreign reserves, economic growth, dollarization, inflation, liquidity, and external account conditions.