The bank raised its discount rate to 5.00 percent and
repo rate to 4.75 percent. Overnight rates on the dinar, which banks receive on
excess liquidity, rose to 2.75 percent.
The bank began raising rates last year after a period of
cuts since 2008, when the bank eased monetary policy to cushion the economy
from the impact of the financial crisis and to curb inflationary fears.
The hike comes almost three weeks since the appointment
of a new central bank governor, Ziad Fariz, a reformist who won the respect of
the International Monetary Fund (IMF) and banking circles in Jordan and abroad
during long stints as key economic decision maker.
Fariz has vowed to bolster monetary stability as the
country faces slow growth and the impact of regional political uncertainty on
investment sentiment, with a drop in foreign capital inflows last year.
"The central bank will continue its policy of
enhancing monetary stability, whose pillars are controlling inflation and the
stability of the exchange rate of the dinar," Fariz was quoted as telling
bankers in the first meeting this month.
The Central Bank of Jordan (CBJ) 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.
Bankers said the central bank move to hike rates, even
though it would hurt companies struggling during a downturn by raising cost of
credit, showed the priority was now bolstering the local currency's
attractiveness than to spur the economy or curb inflation.
"Because of the political uncertainty and events
around us, I think the priority number one for the central bank is to stabilize
the dollar-dinar cross rate and to make it more attractive to deposit in
dinars," said one banker who requested anonymity.
Inflation has been kept under control, helped by a freeze
on gasoline price rises. Inflation averaged 4.4 percent last year, compared
with 5 percent the previous year.
Economists and bankers said the tightening of monetary
policy had now the priority of encouraging dinar denominated savings by
widening the differential between the dinar and the dollar to over 3 percent to
stem capital flight.
Bankers predicted the move will be followed by other
hikes and will have an immediate impact on increasing dinar accounts in a
banking sector with over $34 billion deposits.
"This move is to make dinar deposits
attractive," said Haytham Kamhiyah, managing director of Jordan's Capital
Bank.
