KUWAIT: The decision to raise the basic interest rate on the US dollar took effect on September 21, 2022. Now the debate is not on the inevitable raise for the 5th time during the current year but on its rate itself, whether it will be 0.5 percent or 0.75 percent as in last July. Most analysts believe that the raise will be 0.75 percent due to the news and analyses about the high inflation rates prevalent in the US, the UK and the European Union.
The driving factor behind the rate policy in those countries is primarily the prevailing inflation scenario. The target underlying the interest rate hike is either increasing the demand cost on funds, which means reducing their availability for consumption and investment and their repercussions, or the opposite which is curbing their availability to operate the economy, ie the economic growth. Those countries experienced two-digit inflation and coexisted with deep economic stagnation in the 1980s, one of the worst eras for the global economy in its modern history.
A similar era will likely reoccur in the 2020s. If that happens, the obsession of the monetary and financial policy-makers will be the choice between the bad and the worse. What provides us with some hope is that the international monetary and financial administrations have experienced and benefited from the 1980s experience; this will enable them to exit from the current crisis with the lowest costs similar to the post-2008 events versus 1929 (The Great Depression).
In fact it is the concern of the advanced economies but not the concern of Gulf countries though their choices to act in tandem with the interest rate on the US dollar are limited. In July 2022 increase, the five GCC states, whose currencies are pegged to the US dollar, raised their interest rate by 0.75 percent, similar to the US dollar, not out of fear of inflation or concern about development but to halt a likely exodus of depositors in their currencies to the US dollar as long as their currencies' exchange rates versus the dollar are fixed.
Kuwait has some flexibility in its monetary policy because it pegs the Kuwaiti dinar with a basket of hard currencies though the dollar's weight is dominant. Therefore, it raised the discount rate on the Kuwaiti dinar by half a point twice. The flexibility margin between the interest rate on the US dollar and that on the Kuwaiti dinar shrank to 0.25-0.50 in favor of the Kuwaiti dinar, making the CBK flexibility margin very meager. Accordingly, we believe that Kuwait will raise the interest rate equal to that of the US dollar unless the CBK has supporting tools and policies with unknown efficiency.