AMMAN –– Economists have differed on the feasibility of the Central Bank of Jordan’s (CBJ) decision to raise key interest rates, with some arguing it would likely have a limited impact to prevent inflation from running out of control.

On Tuesday, CBJ Governor Faris Sharaf decided to raise overnight deposit window rate up to 2.25 per cent from 2 per cent and the repurchase agreement rate to 4.25 per cent up from 4 per cent.

The rediscount rate will also go up to 4.5 per cent from 4.25 per cent.

Sharaf said in a statement that the decision seeks to curb inflationary pressures and maintain monetary stability in addition to protecting savings in Jordanian dinar, which is important to the stability of the local currency exchange rate.

According to official figures, the consumer price index rose to 4.5 per cent in April driven by increases in the prices of several commodities and services.

Economist Yusuf Mansur said the timing of the recent monetary policy was not appropriate, insisting the decision will not have a direct impact on battling inflation, which is mainly imported due to sharp rises in international prices of oil and food.

“A small country like Jordan cannot fight inflation because around 87 per cent of our food consumption is imported and 96 per cent of fuel needs are also bought from abroad,” Mansur told The Jordan Times Tuesday.

Commenting on the timing of the CBJ decision, the economist explained that it will affect liquidity in the country, which, he said, has not yet recovered from the economic slowdown, warning that if banks raise interest rates on credit facilities without raising interests on deposits this will lead to “pure damage” to the economy.

The Central Bank should have instead urged local banks to reduce interest rates on loans and increase interests on deposits, he suggested, adding that banks tend not to listen to the CBJ’s instructions. He said such behaviour has been noticed on several occasions when the Central Bank reduced interest rates few times in response to the global financial crisis but banks never responded by easing credit facilities restrictions.

Mansur stated that the CBJ’s step may be aimed mainly to preserve the exchange rate of the dinar by making it more tempting for deposits; however, he noted, the exchange rate of the currency is not at risk.

A veteran banker, Mefleh Aqel, agreed with Mansur that banks will tend to increase interest rates on loans only under the pretext that interest rates on deposits are already high.

Describing the decision to raise key interest rates as a positive step in the right direction to slow inflation, Aqel, however, had doubts that the monetary policy will be able to cool the imported inflation.

“I hope banks do not use the decision to raise interests on loans because banks still charge interests that are much higher than what they should be,” he said.

But economic and political analyst Zayyan Zawaneh, argued that the CBJ’s step was appropriate to dampen inflation rate before it runs out of control.

The main concern of the monetary policy is to contain inflation which could have negative impact on the economy and the social stability, Zawaneh, a former adviser at the Central Bank of Jordan, the Ministry of Finance and the International Monetary Fund, told The Jordan Times.

“Jordan’s economy is experiencing inflationary pressures due to the rise in international oil and food prices,” he noted, adding that the volume of credit facilities extended by local banks have seen a tangible increase recently.

These developments prompted the CBJ to raise key interest rates to boost economic stability, Zawaneh remarked.