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‘Controlling interest rates effective tool in face of global inflation’

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Consumer price index jumps in Russia-Ukraine crisis

KUWAIT CITY, March 19: The Central Bank of Kuwait’s decision to raise the discount rate by 0.25% to 1.75% instead of 1.5% (the historically low) is supposed to work naturally to limit the rise in prices, as interest rates are an effective tool of monetary policy in the face of global inflation according to two well-known economists, reports Al-Anba daily. The daily quoting the two economic experts pointed out that the price increases are linked to logistical factors related to supply and financing chains, as well as the occurrence of geopolitical events, foremost of which is the war between Russia and Ukraine, which was a major cause of price hikes during the recent period.

Former CEO of Finance House Bank, Chairman of the Board of Directors ACICO Mazen Al- Nahedh Group stated that the rate of raising the discount rate from 1.5 to 1.75% will not affect consumers significantly, indicating at the same time that the interest on deposits will rise at a rate of 0.25%, as is the case with anything, saying this minimized the impact of raising interest rates on consumers, he indicated that its impact will be greater on those who have giant loans with banks and large companies, as the cost of borrowing will rise by 0.25%, and this is reflected in the profits in the end, as the cost will increase on the private sector, which is expected and not surprising.

He pointed to the positive effects that the decision will have on the banking sector, especially with the base of low-cost or no-cost deposits such as current accounts, as banks will benefit from these funds with an additional 0.25%, which is positive for banks. Regarding consumer spending in light of the wave of price hikes during the current period, and the impact of the decision to raise interest rates on it, Al-Nahedh said, “The decision to raise interest rates is supposed to reduce the inflation that is currently occurring, as the reason for raising interest rates in the first place is that we are almost tied to the dollar, and the situation in America is similar to Kuwait in terms of high prices. He added, “Unfortunately, prices rise all over the world, which leads to inflation, and the Federal Reserve raises interest rates to reduce inflation.

It is assumed that this will happen in Kuwait, but we have other factors that affect, such as the war between Russia and Ukraine, which caused the sharp rises in prices in the first place.” In turn, the former Minister of Commerce and Industry, Dr. Amani Bouresli, expected that interest rates on the dinar would witness an increase in the coming months, indicating that the central bank’s recent increase in the discount rate would not be the last this year, in light of the rapidly growing economic variables, especially consumer price rates, which requires the monetary policy regulator to intervene with his tools to manage these variables.

Bouresli told the daily that Kuwait is witnessing relatively low interest rates, which makes the trend towards saving the last option for a large segment of citizens and residents, which automatically pushes towards an increase in consumer spending and the consequent rise in inflation rates, which were also linked during the current situation which is subject to many global geopolitical variables, in addition to commodity price increases as a result of supply chain disruptions.

The official stated that raising the interest rate would direct many individuals to save in the hope of higher interest rates, which would reduce consumer spending rates and automatically reduce inflation rates in commodity prices, not to mention reducing borrowing rates by individuals. Bouresli pointed out that the monetary policy in Kuwait is balanced and takes into account all variables, as the dinar is linked to a basket of major currencies, at the forefront of which is the US dollar and not just one currency, which gives decision-makers an appropriate space in order to raise or lower interest or fix it according to local and global variables as well or both in order to achieve the desired purpose of intervening with monetary tools in the best way, as well as raising the interest rate in line with the US Federal Reserve’s decision to raise interest rates in an upward trend for interest during the coming period.

The banking sources revealed that the Central Bank of Kuwait decided yesterday to raise the interest rate on “repo” operations with banks by a quarter of a percentage point, so that the repurchase rate for one night became 1.125%, 1.375% for one week, and 1.875% for a month, according to the data published by the Central Bank Thursday on its website.

The “repo” is a price used by the CBK within the agreement to repurchase government securities from commercial banks to control the money supply. The Central Bank of Kuwait is scheduled to raise the yield on bonds and tawarruq by a quarter point instead of the current rate of 1.125% for 3 and 6 months. Informed sources warned of what prices may witness during the coming period in light of the state’s tendency to increase the liquidity rates of individuals by more than half a billion dinars through the reward of 3,000 dinars for retirees, noting that the exchange must be accompanied by strict control over the markets, and real-time monitoring.

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