Interest Rates

On 30/10/2019, the US Federal Reserve decided to reduce the base interest rate on the US Dollar by a quarter percentage point to 1.75%, which is the third reduction since it began on 31/07/2019, i.e. three reductions in just three months. This provides a strong indication of the US Federal Reserve’s high concern with the economic growth. The US President still wants more than the Federal, perhaps because the results of next year’s elections will be heavily affected by the condition of the US economy then, which prompts the President to demand a bigger and faster rate reduction. However, the Federal Reserve believes the US economy is reassuring within the limits of its actions. An indicator of the rising uncertainty case about the performance of the global economy is that the US Federal Reserve raised the interest rates nine times from 16/12/2015 to 19/12/2018, then held it steady over 7 months in 2019, and followed it by three reductions in the next three months.

Until the recent rate reduction on the US Dollar, the Central Bank of Kuwait (CBK) has opposed the movement of the US Dollar interest rate seven times out of 11 since 16/12/2015, despite the strong negative   pressures  on  the  attractiveness and repatriation of the Kuwaiti Dinar. After the reduced margin on the US Dollar interest rate to its lowest level at half a percentage point until 19/12/2018, that margin rose to a full percentage point after the last two Federal Reserve reductions with the last one of which was on 18/09/2019. This supported the attractiveness of the Kuwaiti Dinar. The CBK thus followed the recent reduction on the base interest rate and lowered its discount rate on the Kuwaiti Dinar from 3% to 2.75%, keeping the margin in favor of the Kuwaiti Dinar at a full percentage point. The repatriation of the Kuwaiti Dinar is a central objective to the CBK because of the weak impact of the interest rate instrument on the local economy growth or on checking inflation because the relationship of growth or inflation with banking credit is weak.

It is to the CBK’s credit that it made difficult decisions when it opposed the US Dollar interest rates trends, unlike most regional central banks. It used other means and tools to maintain the attractiveness of the Kuwaiti Dinar, which proved to be correct later on. With negative projections for the global economic growth, some of which anticipate likely recession similar to the 1929 and 2008 crises, though we do not agree with such predictions, the US Federal Reserve is likely to continue to reduce its base interest rate and the CBK will follow suit keeping the 1% margin between the interest of the two currencies.