Interest Rates

After the Federal Reserve decision on 31/07/2019 to cut down the base interest rate on the USD by a quarter percentage point to reach 2.00%, it also decided on 18/09/2019 to cut down the interest base rate again on the US$ by another quarter percentage point reaching 2.25% down from 2.50%. The base interest rate on the USD ranged from zero to 0.25% during the period from 16/12/2008 until 16/12/2015 when the Federal Reserve believed that the US economy has overcome the aftermath of the 2008 global financial crisis and more concern shifted towards inflation rather than economic growth. After the increase by a quarter of a percentage point in 2015 and another increase by a quarter of a percentage point in 2016 as well, it increased it three times in 2017 and four times in 2018 by a quarter of a percentage point each time before it stopped the increase and until it reversed its direction to reduction, as concerns about the economic growth returned on 31/07/2019 as mentioned above. In a valuable keynote speech at the opening of International Banking Conference “Shaping the Future” last Monday,  the Central Bank of Kuwait governor stated that the Bank of England believes the increase of 10% in US tariffs means the United States lost 2.5% of its GDP and 1% of global economy. In other words, the concern over the US and global growth has become real. The nine interest rate increments mentioned above since the end of 2015 have made the US Federal Reserve the only central bank in the world’s major central banks that has had some flexibility in using the most important monetary policy tools, or interest rate, and is under considerable pressure from the US President for a quicker and bigger decrease.

The Central Bank of Kuwait, and for the second time in the current year, keeps the discount rate fixed at 3.00%, i.e. it does not follow the movement of base interest rate on the USD. In fact, the Central Bank of Kuwait has changed the discount rate on the Kuwaiti Dinar 4 times since 16/12/2016 against 11 changes (9 increases and 2 reductions) on the USD during the same period. Along with the dominance of CBK concern over growth since the 2008 global financial crisis, its concern and its occasional subordination to the USD interest rate movement are driven by the obsession of monetary stability. In other words, the main factor underlying this subordination has always been the protection of the Kuwaiti Dinar’s attractiveness as a store of domestic savings out of fear that a higher interest rate on USD might lead to increase its demand at the expense of the Kuwaiti Dinar. Therefore, it used to employ other compensation tools whenever the interest margin between the two currencies decreased.

While the margin between the base USD interest rate and the discount rate on the Kuwaiti Dinar was 0.50% until 19/12/2018, the margin rose to 1.00% after the last two cuts. We believe that the rising of the margin eases the pressure on the Central Bank of Kuwait. With rise of doubts over the global economy’s growth, coupled with the rise in the escalation of geopolitical events in the region, and the estimated economic growth of the region being among the weakest growth rates in the world, it may now be more likely in the future to reduce the discount rate on the Kuwaiti Dinar if the cuts on the interest rate on the USD continue, which is highly likely.