Kuwait Central Bank hikes discount rate

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KUWAIT CITY, June 15, (Agencies) : The Central Bank of Kuwait (CBK) will raise the discount rate by 0.25 per cent from 2.00 per cent to 2.25 per cent as of Thursday. The CBK also decided to change the rates of monetary policy instruments by varying percentages for the entire interest rate yield curve, including repurchases (Repo), CBK bonds and tawarruq, term deposits, direct intervention instruments, as well as public debt instruments, read a statement quoting the Governor Basel Al-Haroun. “This decision reflects the CBK’s incessant monitoring of domestic and international economic and geopolitical developments that resulted in high global inflation rates, mainly driven by increased commodity and energy prices and continuous supply chain disruptions, which constitute a key source of imported inflation affecting the consumer price index in the State of Kuwait,” he explained.

The CBK decision also considered the open nature of the Kuwaiti economy that imports most of its commodities. “The decisions taken by the Central Bank of Kuwait around changes to the discount rate, whether by raising or cutting, are informed by thorough assessments of the latest local and global economic data and considerations of the monetary policy that is intended to provide an environment conducive to sustainable economic growth, in particular the non-oil GDP, considers Kuwait’s relations with the world countries and, hence, monitors the movements on global interest rates to determine the appropriate rate for Kuwait conducing to growth of KWD private deposits, which constitute a key source of finance of the national economy,” he added

Decision
The Governor further explained that the decision considered, inter alia, the factors affecting the Consumer Price Index to assess the pressure on such prices. The CBK also considers the local factors affecting the inflation rates including the monetary factors stimulating the overall local demand. The Governor concluded that CBK shall continue to closely monitor the local and international economic, monetary, and banking developments, and, whenever appropriate, shall use the available monetary policy instruments to safeguard financial and monetary stability. Meanwhile , the Federal Reserve on Wednesday intensified its drive to tame high inflation by raising its key interest rate by three-quarters of a point – its largest hike in nearly three decades – and signaling more large rate increases to come that would raise the risk of another recession.

The move the Fed announced after its latest policy meeting will increase its benchmark short-term rate, which affects many consumer and business loans, to a range of 1.5% to 1.75%. The central bank is ramping up its drive to tighten credit and slow growth with inflation having reached a four-decade high of 8.6%, spreading to more areas of the economy and showing no sign of slowing. Americans are also starting to expect high inflation to last longer than they had before. This sentiment could embed an inflationary psychology in the economy that would make it harder to bring inflation back to the Fed’s 2% target.

Inflation
The Fed’s three-quarter-point rate increase exceeds the half-point hike that Chair Jerome Powell had previously suggested was likely to be announced this week. The Fed’s decision to impose a rate hike as large as it did Wednesday was an acknowledgment that it’s struggling to curb the pace and persistence of inflation, which has been worsened by Russia’s war against Ukraine and its effects on energy prices. Borrowing costs have already risen sharply across much of the U.S. economy in response to the Fed’s moves, with the average 30-year fixed mortgage rate topping 6%, its highest level since before the 2008 financial crisis, up from just 3% at the start of the year. The yield on the 2-year Treasury note, a benchmark for corporate borrowing, has jumped to 3.3%, its highest level since 2007.

Even if a recession can be avoided, economists say it’s almost inevitable that the Fed will have to inflict some pain – most likely in the form of higher unemployment – as the price of defeating chronically high inflation. Inflation has shot to the top of voter concerns in the months before Congress’ midterm elections, souring the public’s view of the economy, weakening President Joe Biden’s approval ratings and raising the likelihood of Democratic losses in November.

Biden has sought to show he recognizes the pain that inflation is causing American households but has struggled to find policy actions that might make a real difference. The president has stressed his belief that the power to curb inflation rests mainly with the Fed. Yet the Fed’s rate hikes are blunt tools for trying to lower inflation while also sustaining growth. Shortages of oil, gasoline and food are propelling inflation. The Fed isn’t ideally suited to address many of the roots of inflation, which involve Russia’s invasion of Ukraine, still-clogged global supply chains, labor shortages and surging demand for services from airline tickets to restaurant meals.

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