Interest Rates

US Federal Reserve started its journey in raising interest rates by raising it by a quarter point percent on December 16, 2015 justifying the increases after a series of decline and then stabilizing it near zero for nearly 7 years, the US economy began the recovery and the unemployment rates are constantly falling. The concern now is about the pressure which warrants hedging against inflationary pressures. It stopped for one full year after that to repeat the increase by a quarter percentage point on December 14, 2016. After that the Federal Reserve raised the base rate on the US Dollar seven times: three times in 2017 and four times in 2018. Despite promises to continue raising it, it stopped in 2019 because the concern about the slow US economic growth and the global economy is the most important despite the drop in unemployment levels in America to a historic record level, about 3.7%.

During that era, between December 2015 and the end of 2018 and until July 2019, the Central Bank of Kuwait (CBK) lifted the discount rate on the Kuwaiti Dinar 4 times only, which is 5 times contrary to the US policy. Therefore, the gap between the basic interest on the US Dollar (2.5%) and the discount rate on the Kuwaiti Dinar (3.0%) decreased to half a point percent. CBK’s justification lies in the different condition of the two economies. The US Federal Reserve warnings about the growth strength and perhaps the hotness of the Us economy, although the targeted inflation rate of 2% was not achieved, was met by concern about weak growth of the domestic economy which achieved negative growth last year. The concern in Kuwait about the reduced margin between the two interest rates is about the superiority of the US Dollar’s attractiveness to the local depositors at the expense of repatriation of the Kuwaiti dinar. CBK treated that by compensating local banks about the difference which enables them to increase interest rate on deposits and it succeeded in that.  

Now, it seems the situation is different. Signals are brighter and from the US Federal Reserve Bank about more concern about growth and later on it will adopt any required action to support the activity of the US economy. The indication here is to a probable return to reducing interest rates. In fact, the US Federal Reserve is under unprecedented pressure from the US President to adopt this trend, and the US president considers supporting economic growth by any means his main card to win November 2020 elections. If reduction is achieved without necessarily reducing the discount rate on the Kuwaiti dinar, the interest margin will go up in favor of the Kuwaiti dinar. That means less pressure on CBK to adopt any measure and perhaps.