Mohammad Y. Al-Hashe, governor of the CBK, the central bank of the State of Kuwait, said in a statement from Dec. 16 that the rate rise would ensure higher returns for holders of the Kuwaiti Dinar (KD) "particularly in light of the announcement by the US Federal Reserve to raise the federal funds target rate, as a first step to revert to traditional monetary policies after a long period of time implementing exceptional policies known as 'Quantitative Easing,"
Since May 2007 the exchange rate of the dinar has been pegged to an undisclosed weighted basket of currencies of Kuwait's major trading partners.
The KD has been depreciating since mid-2014, in line with the fall in crude oil prices, and was trading at 0.30 to the U.S. dollar today, down 3.3 percent this year.
The governor also said that Kuwait is facing facing challenges from lower global oil prices that will have an adverse effect on growth, which underlines the importance of boosting the confidence and enhancing the attractiveness of the dinar.
The Central Bank of Kuwait issued the following statement:
"The Board of Directors of the Central Bank of Kuwait (CBK) decided to raise the Discount Rate by a quarter percentage point to 2.25% from 2%. His Excellency, the Governor and Chairman of the CBK Board of Directors, Dr. Mohammad Y. Al-Hashel, announced in a press statement to Kuwait News Agency (KUNA) that CBK decision to raise the discount rate comes into effect from Thursday, 17/12/2015, and reflects CBK efforts to ensure competitiveness and attractiveness of the national currency as a store of domestic savings, and to further strengthen the supporting environment for all the sectors of the national economy. The Governor further explained that the Discount Rate in the State of Kuwait, which is set by CBK, is used to determine maximum interest rates on KD borrowing transactions at local banks and, accordingly, raising the discount rate ensures competitiveness and attractiveness of the national currency as a store of domestic savings and higher returns for KD depends compared to other major currencies, particularly in light of the announcement by US Federal Reserve to raise the federal funds target rate, as a first step to revert to traditional monetary policies after a long period of time implementing exceptional policies knows as “Quantitative Easing”.
The Governor also explained that raising the Discount Rate from its historically low level is based on an assessment of domestic economic conditions and movements of the financial, monetary and banking indicators. The current challenges driven by the lower global oil prices will adversely affect growth of the non-oil economy due to the uncertainty about the general economic performance. These challenges underline the importance to boost the confidence levels and enhance the competitiveness and attractiveness of the national currency to enable the various national economic sectors to continue their sustainable growth with monetary stability and financial stability which the CBK strives to strengthen.
Dr. Al-Hashel pointed out that changing the Discount Rate necessarily involves costs and benefits. Developments in current local and international conditions, particularly after raising the Federal Funds Target Rate and unwinding the Quantitative Easing Program, necessitated raising the CBK Discount Rate to enhance competitiveness and attractiveness of the national currency, being a store of the domestic savings and the main source of funding for the various sectors of the national economy.
The Governor concluded his statement by emphasizing that the CBK is keen to fulfill its responsibilities in the areas of monetary policy, banking supervision and oversight, based on a thorough assessment of domestic and international developments and taking the necessary actions to ensure enhancement of the financial and monetary stability thus supporting the national economy towards sustainable development."
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