By Suleiman al-Khalidi
UPDATE 2: Central bank pledges 50 basis points cut to boost liquidity and ensure banks extend cheap credit.
Jordan's Central Bank on Wednesday said it will cut its benchmark lending rates on Thursday by 50 basis points to boost liquidity and ensure banks extend cheap credit amid the global financial turmoil.
The Central Bank of Jordan (CBJ) cut its discount rate to 5.75 percent and repo rate to 5.50 pct as of Thursday, March 12. Overnight rates on the dinar, which banks receive on excess liquidity, were cut to 3.50 percent.
The CBJ also said it will cut the compulsory reserve requirement on private banks' foreign and domestic currency deposits to 8 percent from 9 percent as of end of April.
"The drop in inflation has encouraged the Central Bank of Jordan to reduce its main interest rates by a half a percentage point to spur growth," the bank said in a statement.
Bankers say Jordan is among the countries worst hit in the Middle East from the fallout of the global financial crisis with a forecast drop in remittances and foreign investments by Gulf Arab investors hit by turbulence in Western markets and a sharp drop in oil revenues.
Officials say the economy could slow down in 2009 to almost half the 6 percent averaged annually in the last few years.
The monetary authorities' move to cut Jordanian banks' statutory reserve requirements on commercial deposits was to free up more funds for lending to spur economic growth, officials and bankers said.
The monetary authorities, worried about tighter liquidity after banks had over extended credit in recent years, say the cuts could be major stimulant to growth.
The move is the second reduction of key rates since November to spur growth as the impact of the financial crisis deepens.
The CBJ had resisted earlier cuts last year on the grounds they could fuel inflationary pressures.
On Wednesday it said it was now satisfied those fears were ebbing with inflation falling by 0.5 percent in January thanks to lower oil and commodity prices. The CBJ said inflation was an average 14.39 percent in 2008.
The CBJ said inflation should fall to between 6 to 7 percent this year due to the fall in oil and commodity prices.
The bank has traditionally maintained a high interest rate policy to preserve the attractiveness of dinar-denominated assets and to hamper any excessive outflow of dinars into dollar denominated assets.
It usually ensures a differential between the dinar and the dollar of around at least four percent to stem capital flight. (Reuters)For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.