Interest rate hikes harm economic growth, investors, and individual borrowers

(Photo: Shuterstock)
AMMAN — A 50 basis points rise in interest rates will negatively affect Jordan’s economic growth, decreasing investments and hampering job creation, pundits contend.اضافة اعلان

On May 8, Jordanian commercial banks raised their interest rates, following the footsteps of the Central Bank of Jordan (CBJ), which hiked the interest rates by 50 basis points on all monetary policy tools, from loans and facilities provided to individuals and institutions.

The loans had varying rates, ranging between 5 and 10 percent, depending on the value, its term, and the details of the contract between the bank and the customer, according to media reports.

CBJ increased interest rates on the Jordanian dinar after the US Federal Reserve raised interest rates on the US dollar. The Jordanian dinar has been pegged to the dollar since 1995.

Earlier this year, CBJ raised the interest rate by 0.25 percent after a similar decision by the US.

The CBJ said in a statement that its decision was in line with its objective of “maintaining monetary and financial stability in the Kingdom”. Another motive was to contain an expected domestic inflationary pressure stemming from a continued rise in global inflation rates, in regional and international financial markets.

But former Minister for State of Economic Affairs Yusuf Mansur told Jordan News that the increase will potentially weaken projected economic growth, as higher interest rates dampen consumption, or demand, and production, or supply.

Public enthusiasm for products with a high price-to-income ratio will fade as commodities become more expensive with the rise of interest rates.
...Most banks do not borrow from the Central Bank and, therefore, have no reason to raise the interest rate on loans and deposits since they are using existing bank deposits.
“Producers and investors would shy away from expansion or new investments as the cost of borrowing rises,” Mansur said.

 “That would weaken economic growth and retard economic recovery. Furthermore, people would worry about borrowing for fear that the Central Bank will authorize three more hikes in interest rates in tandem with the announced future actions of the Federal Reserve in the US.”

 Mansur emphasized that most banks do not borrow from the Central Bank and, therefore, have no reason to raise the interest rate on loans and deposits since they are using existing bank deposits.

The interest rate increases would lead to increased profitability for banks, while the economy remains stagnant, Mansur pointed out.

Tariq Al-Hijazi, director-general of the Jordanian Businessmen Association said that interest rates are the “number one enemy” for investors and business people.

The increase is also expected to negatively affect investments in general, since people are more attracted to parking their money in the banks to profit from high-interest rates on deposits, instead of starting a new investment.

“Interest rates are connected to a big economic wheel; increasing the interest rate will suck the cash from the market, investments will decline, and so will investment expansion,” Hijazi said in an interview.

Economic adviser and former president of the Banks Association Adli Kandah warned of negative repercussions on the economy and people. But he explained that central banks worldwide increased interest rates to fight inflation, like in the US, although their economic performance was good.

But, he added, Jordan’s economic growth was already weak, and as a result, commercial banks should have kept interest rates as they were.

Kandah explained that CBJ was forced to increase the interest rate because the dinar is pegged to the dollar. Since the US Federal Reserve raised interest rates, CBJ had to do the same to maintain exchange compatibility, preserve the value of the dinar, and protect foreign currency reserves. With that, people would not take their deposits abroad, he added.

“This will harm both old and new borrowers, besides impacting potential new investors,” Kandah said.

Former president of the Jordan Investors Association Bassam Hamad said the increased interest rates will hurt both industry and commerce, decrease profit margins and reduce market competition.

 “Interest rates on loans are very high in Jordan, especially for merchants and investors, so any increase, even if it was minor, will have a major impact,” Hamad said.

Those feeling the pain are clients who took personal loans, to pay for a car, an apartment, a wedding, school university tution or others, against fixed salaries. Ramzi Al-Karmi, a borrower, told Jordan News that he did not expect the interest rate on his personal loan to be hiked twice in few months.

“I had a certain monthly budget, and I do not understand why this increase happened; my bank did not even inform me that it will happen, I just noticed that they were deducting more money from my account,” Karmi said.

Read more Features
Jordan News