Jordan's Central Bank on Sunday raised benchmark rates by 50 basis points, its second hike since June, to encourage savings in dinar denominated assets at a time of regional political uncertainty, bankers and the central bank said.
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.