After the decision of the Central Bank of Kuwait to raise the discount rate by a quarter of a percentage point the day before yesterday, a well-deserved discussion took place about the reasons why the Kuwaiti authorities decided to follow the approach of the US Federal Reserve, which raised interest rates by the largest increase in 28 years, specifically since 1994?
Analytically, it should be noted at the outset that the “Central Bank of Kuwait” was not the only one that joined a bloc to adopt an increase in interest, as the central banks in the Gulf and around the world rushed to take a similar step, at rates close to the rate of 75 basis points approved by the “Fed”, taking into account the Kuwaiti interest rate hike was the lowest in the Gulf region, with the exception of Oman, which did not announce until yesterday evening any rate hike after the last “federal” move.
The Central Bank of Kuwait decided to raise the discount rate by 25 basis points to 2.25 percent, while the Central Bank of Bahrain increased the interest rate for overnight deposits by 75 basis points to 2.25%, the interest rate for one-week deposits by 75 points to 2.5 percent, and the interest rate for deposits for a period of 4 weeks by 75 basis points to 3.25 percent, and the discount rate is 75 basis points to 3.75 percent.
The Qatar Central Bank also decided to raise the deposit interest rate by 75 basis points to become 2.25 percent, the lending interest rate by 50 points to 3.25 percent, and the repurchase rate (repo) by 75 points to become 2.5 percent, while the UAE Central Bank raised the base rate on Overnight deposit facility of 75 basis points.
The Saudi Central Bank increased the rate of repurchase agreements (repo) by 50 basis points to 2.25 percent and the rate of reverse repo agreements (repo) by 50 basis points to 1.75 percent.
Perhaps the real reasons behind the “Central” tracking the “Federal” decision is simply that the local monetary policy adopts linking the Kuwaiti currency, the dinar, to a basket of currencies, in which the dollar has the largest weight, which makes the tracking likely in one direction, while the rate of this tracking can be controlled — increased or decreased.
In addition, another question arises about the reason for the “Fed” and other central banks resorting to raising interest rates, including the Bank of England, which increased the interest rate to 1.25 percent, for the first time since 2009, despite fears that this would lead to an increase in the risk of default and achieving economic growth.
In fact, high rates of inflation are the main driver of interest-raising decisions, given that the lack of control over them is very bad for the economy for several factors, the first of which is that high inflation is bad for investments, as it reduces the value of returns on them, for example, a person may be happy when the stock exchanges rise with the returns of his investments in them But in reality, the value of these returns diminishes when inflation increases, because their purchasing power diminishes.
The second thing is that inflation is bad for savings. If a person saves $10,000 at a 2% interest rate before inflation, i.e. with a return of $200 annually, a 3% increase in inflation will reduce the purchasing power of his savings by $100, which means that he will obtain a negative return of about 1 percent, when adjusted for inflation.
“The more (the Fed) raises the interest rate, headwinds will blow on the economy, and this will increase the risks of a sharp slowdown or a strong recession, since inflation is at its highest levels in 40 years and interest rates are at their lowest levels in history,” said Greg McBride, chief financial analyst at Bankrate. Recession is a price to be paid in order to control inflation.”
The third thing is the decline in investments, especially when inflation rises to record levels as it is happening now, when returns become less, companies refrain from investing and spending, and thus the economy begins to decline, and opportunities diminish, so central banks see that it is better to move and control the economy before it is too late.
In terms of the effect on individuals, inflation is bad for those who live on a fixed income such as salaries, because when everything becomes more expensive, the purchasing power of money actually becomes less.
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