Governor Umayya Toukan says that policy tightening may be needed if inflation advances
Jordan's central bank sees no need to change interest rates for now but more restrictive policy may be necessary if inflation goes above 5 percent, its governor said on Monday.
"There is no need I think to change interest rates," Umayya Toukan told Reuters on the sidelines of a financial conference in Kuwait.
"They are at 2 percent today and with inflation rates as we mentioned …- it means the real rate is negative, minus 2 or so, and that's really a very clear evidence that we do not need to lower interest rates," he said.
Annual inflation stood at 4.7 percent in September and the governor said he expected it to stay at 4-5 percent.
The central bank's policy is aimed at defending the dinar, which is pegged to the dollar, a policy which the authorities say has served the national economy well.
The bank has traditionally maintained a policy of keeping interest rates relatively high to enhance the appeal of local assets and to prevent any excessive capital outflows. Inflation's fall from record highs and the economic downturn, however, had prompted the bank to slash its benchmark rates by 250 basis points in total since November 2008. Its discount rate stands at 4.25 percent and the overnight rate is at 2 percent.
Reviving inflationary pressures this year have fuelled expectations among analysts and dealers in domestic money markets that scope for further interest rate cuts is decreasing.
Annual inflation in the crude-importing kingdom has picked up from 3.9 percent in January as commodities and oil prices increased.
Economists expect it to hover around 6 percent this year but the government still expects it will stay at around 4-5 percent.
Toukan said on Monday that policy tightening may be needed if inflation advances above the central bank's expectations.
"We hope that it (inflation) will stay between 4-5 percent (in 2010) ... If it really exceeds that range then monetary policy should be more restrictive," he said.
"We cannot as central banks allow inflation to get out of hand because that could really be bad for investments, for growth," he said.
Toukan also said he expected economic growth to accelerate gradually in the coming months.
"The growth rates for 2010 may be between 3-4 percent, but in 2011 it may be 5 percent," Toukan said.
"So we know it will be gradual, it will be slow, but then that's the way because of the global crisis it will take time to restore confidence and to clean all the balance sheets and to perform all the reforms necessary," he said.
Jordan's economic growth accelerated in the second quarter to 2.9 percent year-on-year and the International Monetary Fund forecasts a 3.4 percent expansion in 2010.
The economy grew 2.8 percent last year, slowing from 7.8 percent growth in 2008, its worst performance since an economic crisis in 1989 when the country was forced to seek help from the International Monetary Fund. (Reuters)