KUWAIT CITY, Dec 13: After the Central Bank of Kuwait announced two days ago the 25-basis-point reduction in the key interest rate (discount rate) from 3.75 percent to 3.50 percent, the newspaper raised the looming question about the repercussions of this move on the local market. Two experts in the financial and economic fields supported the decision, indicating that it will have a positive impact on both the national economy and consumers. They explained that interest rate reductions are typically accompanied by other measures, such as the withdrawal of deposited funds and their release into the market. They added that borrowing rates from banks tend to increase due to the lower interest, which encourages the implementation of many projects. They believe this move will attract more foreign investments, emphasizing that interest rate cuts play a crucial role in adjusting inflation, which directly impacts consumers, as high rates harm those with fixed income. Economic analyst Sultan Al-Jazzaf affirmed that this is a positive move, because most economies are linked to the American economy and the dollar, hence, Kuwait, along with other Gulf Cooperation Council (GCC) countries, decided to reduce the interest rate to align with the action of the US Federal Reserve.

He said there are many significant advantages of this move, as it will encourage many citizens to invest in the market, instead of keeping their money in banks. “This, in itself, will break the economic slowdown and stimulate the market,” he explained. He pointed out that the reduction will increase borrowing from banks to launch more projects in the private sector. He confirmed that this openness will positively affect the resolution of the unemployment problem by encouraging the implementation of projects in the private sector. He said local and foreign investments will witness higher growth. He stated that this step will help the global economy, particularly the US economy, emerge from the slowdown, which will positively affect global financial markets. He also highlighted the role of this reduction in balancing inflation rates in Kuwait and other global economies

He clarified that the interest rate reduction is not linked to oil production and prices, as it incentivizes oil companies, such as Kuwait Petroleum Corporation (KPC) and other international oil companies, to expand their operations due to lower borrowing costs. Meanwhile, Dr. Manal Al-Kandari, an economic expert and former secretary of the Transparency Association, stated that the reduction of the discount rate is aimed at supporting economic activity in Kuwait. She explained that reducing borrowing costs prompts individuals and companies to inject more liquidity into the market, thus, increasing spending. She pointed out that this step aims to maintain monetary stability while supporting growth in light of global economic developments, which require a flexible response from fiscal and monetary policies in Kuwait. She said this decision confirms the commitment of the Central Bank of Kuwait to adopt well-considered policies in line with the conditions of each economic phase, ensuring the protection of the local economy from potential shocks, strengthening the banking sector, and supporting the economic development of the country. She added this move maintains the stability of the national economy, preventing it from being affected by the decision of the US Federal Reserve. She disclosed “this step will preserve liquidity levels in local banks, as interest rates play a crucial role in shaping financial and economic markets in general, encouraging increased consumer spending and mitigating the effects of recession.

It will increase the volume of foreign investments in the country, leading to growth in foreign investment in the local market.” On the sectors that will benefit from the interest rate reduction, she cited trade, industry, international shipping, automobiles, and wholesale and retail trade. She said the local real estate sector will be the most active as a result of the interest rate cut due to increased demand for property purchases and incentives for real estate companies and individuals to borrow for construction purposes, thereby, boosting activity in the contracting sector and the building materials market. She stated that the interest rate cut will also revitalize the local and global gold markets, as gold is considered a safe asset that appreciates positively, benefiting consumers when they need to sell. She pointed out that private companies’ profits are booming due to lower interest rates, resulting in reduced borrowing costs. “This encourages companies to borrow more to expand their operations in local and promising markets, creating numerous job opportunities,” she elaborated.

She said the interest rate cut leads to a balance in inflation rates, preventing those with limited fixed income from being negatively impacted by the rising prices of basic necessities like food and clothing. “Simultaneously, it reduces spending on non-essential and essential goods, leading to market stagnation that forces some shops to close due to their inability to pay rent and employee wages. Therefore, carefully set interest rates are crucial for controlling inflation, especially since companies raise prices in response to rising costs and the demands of import and export activities,” she added.

Advantages of the interest rate cut:

- Balance inflation rates

- Protect the local economy from potential shocks

- Strengthen the banking sector

- Stimulate industrial sectors

- Revitalize buying and selling activities

- Encourage investment in markets

- Enhance borrowing from banks due to reduced costs

By Najeh Bilal Al-Seyassah/Arab Times Staff