Interest Rates

On 03/03/2020, by an unprogrammed and unprecedented decision since the financial crisis in the fall of 2008, the US Federal Reserve reduced the base interest rate on the US Dollar by half a percentage point, or from 1.75% to 1.25%. The US Federal Reserve is the only major central bank that has some flexibility in moving the interest rate tool, followed by interest on the Sterling Pound of 0.75%, 0% interest rate on the Euro and then the Japanese Yen interest is -0.1%. The latter that announced that it would support and face the “Corona” crisis has nothing but pumping more liquidity.

We mentioned previously in the above article that central banks lost their leading role and overwhelming influence they exercised in confronting the global financial crisis in 2008 because their tools and resources are semi-depleted and their role has become secondary and supportive but influential psychologically in mitigating panic. The US Federal’s decision will not be influential in its economic dimension but it represents financial support to reduce the deterioration of asset prices so that the crisis does not transfer to the financial sector along with the political incentive. While the purpose of the reduction decision might have been a desire to avoid a political confrontation with the US President who has repeatedly attacked the Federal Reserve policies by not lowering interest rates at higher rates. This time, while he is on the brink of Presidential elections, he may resort to more than a verbal attack. The last major interest rate decrease on the US Dollar by a quarter of a percentage point was on 30/10/2019 and was preceded by two quarter-percentage cuts for each: the first was on 31/07/2019 and the second was on 18/09/2019. It stopped the reduction in a meeting on December 11th 2019, after it was satisfied with the strong performance of the American economy.

On 04/03/2020, the Central Bank of Kuwait decided to reduce the discount rate on the Kuwaiti Dinar by a quarter of a percentage point from 2.75% to 2.50%. The last reduction on the discount rate on the Kuwaiti Dinar took place on 30/10/2019, with the pre-current reduction of the base interest rate on the US Dollar, and at a quarter of a percentage point to become 2.75%, and the recent reduction on the US Dollar & Kuwaiti Dinar, the margin between the base interest rate between the US Dollar and the Kuwaiti Dinar is 1.25% in favor of the Kuwaiti Dinar, which means that the Central Bank of Kuwait has violated the policies of the US Federal Reserve twice out of 4 recent reductions. This means the high attractiveness of the Kuwaiti Dinar against the US Dollar adds more flexibility to the discount rate on the Kuwaiti Dinar if the Central Bank of Kuwait wishes so. But the relationship of reducing the discount rate is weak in supporting local economic growth and it is weak and is not needed to support the liquidity of financial assets for the reasons we mentioned in another paragraph of this report. And the last reduction on the interest rate on the Dollar is the last basis on the last US Dollar, or “Corona” reduction is exceptional, and it is very difficult to predict the course of the base interest rate movement in the future because it depends on variables related to the ability or the inability to control the spread of the disease; therefore, its role remains supportive in its psychological impact.