Are Dinar and Interest Costs Justified
The article focuses on the relationship between interest rates of the Jordanian dinar and the US dollar, and their impact on currency stability. It explains that, despite Jordan's fixed exchange rate of the dinar against the dollar since 1995, the country does not always follow US interest rate movements point for point. The study highlights that Jordanian interest rate responses to US rate changes have been less than one-to-one and are influenced by domestic factors such as inflation and output gap, providing the Central Bank with flexibility in setting the interest rate differential needed to maintain currency stability. The findings indicate that, under strong economic conditions, high reserves, and high confidence in the dinar, there is no need for a large interest rate premium. Conversely, during weaker conditions, a larger necessary premium becomes evident. The analysis clarifies that the optimal interest rate is not the lowest possible rate but the one that protects the currency's attractiveness and balances risks with economic costs. This approach benefits from previous experiences, such as the 2008-2009 crisis, where the Central Bank gradually reduced interest rates without losing confidence. Based on current indicators—such as reserves of approximately $28.4 billion, growing at about 2.93%—the question arises: is there a need for the current interest rate differential to finance the dinar, with the aim of achieving the minimum necessary rate that balances currency protection and economic costs?
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