After the US Federal Reserve’s decision yesterday to fix the interest rate in the range of 5.25-5.5 percent, attention turned directly to the Central Bank of Kuwait, which adopts a gradual policy in determining interest trends locally, during which it abandoned its historical policy in terms of following the Fed path.
No new signal has been issued by the local monetary policy maker yet specifying its interest rate trends, whether now or until the end of the year, taking into account that speculation is increasing about the Federal Reserve policy of raising interest rates once or twice until the end of this year, reports Al-Rai daily.
Among the different scenarios, the classic question arises again: what about the impact of interest trends on banks, the stock market, companies, and individual consumers?
In principle, there is an inverse relationship between interest rates and stock markets. When interest rates rise, stocks fall, and deposits and bonds become more attractive.
High interest also increases the cost of money for investors, and if they decide to reduce their borrowing despite their need, their liquidity level and the volume of investment will decline, which puts pressure on stock prices, and on the other hand, when interest decreases, the opposite of the above happens.
In banking terms, banks always aspire to increase the discount rate. Every quarter-point increase in the interest rate in Kuwait means, accounting-wise, for local banks, their quarterly profits will increase by about 60 million dinars, compared to unofficial expectations.
Therefore, bank officials have always preferred to keep pace with Kuwait to increase interest rates globally, because this would reduce the cost of funds for them compared to the operating return they receive from constantly increasing interest, instead of fixing the discount rate and directing them to raise interest on deposits, in exchange for increasing the CBK intervention to regulate banking surpluses.
For companies, when central banks decide to increase the discount rate, their borrowing costs rise, especially in the short term, which results in a multiplier effect on all other borrowing costs for companies and consumers in the economy.
Because borrowing money at high interest costs institutions more, they often increase the rates they charge their customers, so individual consumers are affected by increased interest on credit, as the amount of money consumers can spend decreases.
When consumers have less money for discretionary spending, corporate revenues and profits decline, and individuals appear unequal in assessing the impact of the interest increase on them.
While there is a segment that benefits from the increase by virtue of the liquidity it has to invest in high-yield deposits, there are others who are forced to pay the cost to cover their financing needs with the same interest.
Jumping to the reason why central banks raise interest rates, they usually use this weapon to control inflation.
By increasing interest, the supply of money available to make purchases is effectively reduced, which in turn makes it more expensive to obtain money.
Conversely, when interest rates are lowered, the money supply increases, which encourages spending.