Interest rate increase to slow economic growth, say economists

AMMAN — The Central Bank of Jordan’s (CBJ) decision to raise interest rates could disrupt the government’s efforts to reduce unemployment and increase economic growth, according to economists. 

The CBJ settled on an increase in the interest rate on its various monetary policy instruments by 75 basis points, effective as of Sunday, July 31.

The CBJ’s Open Market Operations Committee recent decision aligned with regional and international monetary markets’ interest rates changes, addressing inflation pressure amid the rising rates of global inflation, the Jordan News Jordan News Agency, Petra, reported.

“Raising the interest rate increases the cost of borrowing, making both credit and investment more expensive,” economist Wajdi Makhamreh told The Jordan Times.

Makhamreh added that the CBJ took this step in order to fight inflation “which is currently being noticed in the local market”, said Makhamreh.

The inflation rate for June stood at 5.17 per cent, which is the highest inflation rate in years, he added.

However, increasing financing costs will negatively affect various economic sectors, “causing the economy to shrink”, said Makhamreh. 

He noted that the CBJ would have been “better of” raising the interest rate by just 50 points, instead of 75. 

He also stated that the country needs “more balanced economic decisions” that consider the effects on numerous economic sectors at once, especially under the current economic conditions that the country is undergoing. 

Another economist, Hussam Ayesh, said, “the CBJ increased the interest rate in line with a move by the US federal reserve, because Jordan’s currency is pegged to dollar.”  

Ayesh added that this decision will disrupt the government’s ability to reduce unemployment and support economic sectors.

“Purchasing power, unemployment, economic growth rate and corporate profit rate will all be negatively affected by this decision,” Ayesh told The Jordan Times.  

He highlighted that increasing interest rates stagnates spending, in addition “the decision will contribute to increasing the cost of living in the Kingdom”. 

He added that it will negatively affect the purchasing power of individuals because people will have to reconsider their spending habits due to the increase in loan payments.

Ayesh said the CBJ aims to maintain monetary stability and the attractiveness of the Jordanian dinar.