October 30, 2019 / 10:29 PM / in 4 months

UPDATE 2-Jordan's central bank cuts rates by 25 bps to spur sluggish economy

(Adds details and background)

By Suleiman Al-Khalidi

AMMAN, Oct 30 (Reuters) - The Central Bank of Jordan on Wednesday said it was cutting interest rates by 25 basis points to 4% in a move to encourage local spending and investment needed to spur sluggish growth, effective Oct. 31. The monetary authorities said in a statement the latest positive indicators in the balance of payments, exports, tourism receipts and continued inflows of remittances encouraged the move to lower borrowing costs.

These positive trends bolstered foreign reserves which stood at $12.4 billion at the end of September, a 7% rise from the end of last year, official figures show.

The healthy level of reserves was also now underpinning a softer monetary policy aimed at injecting more liquidity and prodding private banks to cut lending rates to spur growth, bankers say.

“This decision seeks to raise credit granted to economic sectors and encouraging local expenditure that it would reflect positively on growth,” the Central Bank of Jordan (CBJ) statement read.

The steady buildup in reserves has enabled the CBJ over the last year to cut interest rates. Businesses have blamed high rates for deepening corporate recession.

Despite an economic downturn and a slowdown in domestic consumption, the kingdom has not seen any drop in capital inflows or capital flight, officials say.

The Central Bank of Jordan said the move, which came shortly after a U.S. Federal Reserve rate cut, was in “line with developments in interest rates in international and regional markets”.

Bankers say the (CBJ) policy to allow a wider interest rate differential against the dollar in favour of the dinar had encouraged banks and depositors to keep their funds in dinar-denominated assets.

A main plank of the monetary regime is the defence of the dinar, which is pegged to the dollar, a policy that the International Monetary Fund (IMF) says has served the national economy well.

The CBJ said it “would continue to follow developments and take the needed steps to preserve monetary and financial stability.”

Bankers hope the lower cost of borrowing after a series of cuts since the start of the year, alongside government moves, would improve weak investor confidence hurt by regional uncertainty and kept many investors in a wait-and-see mood.

The government recently slashed fees for real estate transactions and given incentives for exporters and industry to help revive stagnant business activity.

The International Monetary Fund expects Jordan’s economy to grow around 2.2% in 2019 with an average consumer price inflation rate of 2%. (Reporting by Suleiman Al-Khalidi; Editing by Sandra Maler, Jane Wardell & Shri Navaratnam)

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