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Sat 18 Apr 2009 08:09 PM

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Jordan central bank cuts rates

Third interest rate cut in six months aimed at further prodding of banks to extend cheaper credit.

Jordan's Central Bank said it will cut its benchmark lending rates on Sunday by 50 basis points, the third such move in six months to prod banks to extend cheaper credit to spur growth amid the financial turmoil.

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.

The Central Bank of Jordan (CBJ) discount rate will drop to to 5.25 percent and repo rate to 5.00 pct as of Sunday, April 19. Overnight rates on the dinar, which banks receive on excess liquidity, were cut by a similiar 50 basis points to 3.00 percent.

The CBJ also said it will slash the compulsory reserve requirement on private banks' foreign and domestic currency deposits to 7 percent from 8 percent as of Sunday April 19.

"The measure comes in light of the deepening recession in the world economy and the drop in global inflationary pressures and its trickle effect regionally," the governor of the Central Bank of Jordan, Umaya Toukan, said in a statement.

Officials say the economy could slow down in 2009 to almost half the levels that averaged 6 percent annually in the last few years.

The move is the third reduction of key rates since November 25 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.

Toukan said he was now satisfied those fears were ebbing with inflation falling in the first quarter of 2009 to 2.8 percent from an average 9.9 percent in the same period last year, thanks to lower oil and commodity prices.

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.

The monetary authorities, worried that tighter liquidity after banks had over extended credit in recent years was further choking the economy, say the cuts would be major stimulus to growth.

The CBJ's move to cut Jordanian banks' statutory reserve requirements on commercial deposits would free up at least 200 million dinars ($282 million) of cash in a market where many borrowers are suffering financing problems, officials and bankers said.

The banks' reserves held with the CBJ stood at 1.270 billion dinars before the latest cut. (Reuters)

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