Is monetary policy independent in Jordan?

The most recent concepts of the independence of central banks and monetary policy are related to the extent of the independence of the change in local interest rates from international interest rates, especially when the exchange rate policy adopted by the state is the policy of fixed exchange rate, as the case in Jordan. 

However, the concept of the independence of the central bank and monetary policy has been linked since its inception with the extent of its separation from the government, i.e., the inability to force the central bank to finance the budget deficit directly.

The independent institution defines its objectives and tools and takes its decisions without interference from the government or the executive authority, provided that these objectives are largely consistent with the general economic policy of the state. Independence for some also means that the central bank is authorised alone to work to achieve price stability. This is not the case in some countries, where the Ministry of Economy and Industry imposes direct price caps for some commodities at times, and by doing so it participates in a way in achieving price stability.

The Central Bank of Jordan (CBJ) was established in 1964 with little legal independence, like many central banks in the region. With the passage of time, the actual degree of independence increased dramatically, especially during the 1990s after the severe balance of payments crisis, which witnessed a decline in the fixed exchange rate by more than 100 per cent.

The degree of independence of the CBJ has increased significantly, especially the independence in the mechanism of conducting monetary policy, affected by both the development of monetary policy tools and fiscal policy discipline. Fiscal discipline partially means that the government does not resort to financing the budget deficit directly from the central bank.

The main change in the work of monetary policy in Jordan was in September 1993 when it began to adopt indirect monetary policy to control liquidity and interest rates in the market, as the CBJ introduced its certificate of deposit tool.

In 1998, the CBJ introduced another tool for its indirect suite of instruments, as it launched an overnight window deposit facility, which allowed the Central Bank of Jordan to manage liquidity on a day-to-day basis and provided an interest rate floor for interbank lending.

I will not track the development of monetary policy tools in Jordan, but I will answer a major and important question rose which is: Does the change in the central bank policy rates reflect the domestic inflation situation and economic growth rates in Jordan, or the change in the interest rate of the Fed’s funds?

Practically, being an emerging market, global market interest rates cannot be ruled out as an important determinant in the design of monetary policy in Jordan. As Jordan integrates more into the global economy, the impact of world market interest rates on domestic monetary policy becomes clearer. However, what is more important is that domestic interest rates should, at the same time, respond to domestic goals such as output and inflation. What is the case in Jordan? 

Out of the few studies conducted on Jordan, it has been shown that although adjustments in the CBJ’s interest rates are triggered first by changes in interest rates of US monetary policy, these changes give priority to both domestic inflation rates and output gap. Other studies indicate that compared with other emerging markets operating a fixed exchange rate regime, the impact of the US interest rate on Jordan’s policy rates appears moderate, while the speed of adjustment is relatively high. However, the CBJ enjoys the independence in determining the margin of difference between domestic and US interest rates in favour of dinar instruments.

The question that should be answered is: “Is it favourable for Jordan to narrow the margin between domestic and US interest rates and deviate in the opposite direction from US interest rate levels?” The answer is that it is pointless to narrow the margin, and it is not in Jordan's interest to deviate in the opposite direction.