Since Jordan pegged the dinar to the U.S. dollar in 1995, the relationship between Jordanian and U.S. interest rates has become one of the key determinants of monetary policy. Whenever the U.S. Federal Reserve raises interest rates, the Central Bank of Jordan (CBJ) faces a difficult question: Should it raise rates by the same amount to preserve the attractiveness of the dinar, or does it have some room to maneuver in response to domestic economic conditions?

 

The question may appear simple, but it goes much deeper. The real issue is not whether Jordan should follow the Federal Reserve, nor even whether interest rates in Jordan are high or low. Rather, it is this: What is the minimum interest-rate differential between the dinar and the dollar needed to preserve the stability of the dinar without imposing unnecessarily high financing costs on the Jordanian economy?

 

Pegging the dinar to the dollar does not necessarily mean that Jordanian interest rates must move point-for-point with U.S. rates. Jordan’s own experience provides evidence of this. An IMF study on monetary policy in Jordan found that Jordanian interest rates responded less than one-for-one to movements in U.S. interest rates; in other words, they did not fully mirror every rise and fall in Federal Reserve rates. The study also found that the CBJ responded to domestic factors, particularly inflation and the output gap (the difference between actual economic activity and its potential level).

 

This means that despite the exchange-rate peg, Jordan retains a degree of monetary policy space, although that space is limited and varies over time. This finding helps us understand an important point that is often overlooked in discussions of interest rates: the interest-rate differential required to protect the dinar is not a fixed number.

 

When the economy is performing well, economic growth is healthy, foreign reserves are strong, confidence in the dinar is high, dollarization is low, and inflows from tourism, remittances and investment are robust, the dinar does not necessarily require a large interest-rate premium over the dollar. Under such conditions, interest rates are not the only reason households and businesses choose to hold dinars. Confidence, stability, growth, reserve adequacy, and external inflows all work alongside interest rates.

 

The situation changes when growth is weak, external inflows decline, reserves fall, or risks and uncertainty increase. The interest-rate differential then becomes more important because holding dollars may become relatively more attractive. The dinar may consequently require a larger premium to compensate for risk and sustain demand for the domestic currency.

 

The relationship we should therefore consider is not: If U.S. interest rates rise, Jordanian rates must rise by the same amount.Rather, the principle should be: The stronger Jordan’s economic fundamentals, the smaller the interest-rate differential that may be needed to maintain the stability of the dinar. The weaker those fundamentals become, the greater the need for an interest-rate premium. Note that growth can not be the only factor. The economy may record healthy growth while reserves decline, external inflows deteriorate, or dollarization increases. Growth must therefore be assessed alongside a broader set of indicators rather than in isolation.

 

Jordan’s economic history provides an important example. During the global financial crisis of 2008 and 2009, the CBJ lowered interest rates, but not as rapidly as the U.S. Federal Reserve. As a result, the interest-rate differential widened in favor of the dinar. At the time, the IMF noted that this differential enhanced the attractiveness of dinar-denominated assets and contributed to the continued accumulation of foreign reserves.

 

The CBJ subsequently reduced interest rates gradually as conditions improved, without causing confidence in the dinar to collapse. Deposits recovered, while the share of deposits denominated in Jordanian dinars continued to rise. Theexperience shows something more nuanced than simply saying that “high interest rates protect the dinar.”

 

Additional interest-rate protection is valuable when it is needed to preserve the attractiveness of the dinar during difficult economic conditions. But it may provide very little additional benefit—and may not be needed at all—when reserves are strong, confidence is high, and the economy can sustain demand for the dinar with a smaller premium.

 

This leads to a potentially useful concept for Jordanian monetary policy: the “Warranted Interest-Rate Differential.” This is the differential between Jordanian and U.S. interest rates justified at any particular point in time by the state of foreign reserves, economic growth, dollarization, inflation, liquidity, the external account, tourism receipts, remittances, investment flows and the overall level of risk.

 

The warranted differential can then be compared with the actual interest-rate differential. If the actual differential is close to the warranted differential, monetary policy has broadly achieved the required balance between protecting the dinar and avoiding unnecessary costs to the economy. But if the actual differential remains substantially above what economic conditions warrant for an extended period, the difference can be described as an “excess interest-rate premium.”

 

Such a premium is not costless. Higher interest rates are transmitted, to varying degrees, into the borrowing costs faced by businesses and households. They raise the cost of working capital, investment and mortgage finance, and may slow credit growth. They also increase the cost of refinancing public debt and influence investment decisions. The economy could therefore find itself bearing an additional economic cost in return for only a limited additional degree of monetary protection. The objective, therefore, is not to achieve the lowest possible interest rate, but the lowest sufficient interest rate.

 

For Jordan, the appropriate interest rate is not simply the lowest rate the CBJ can announce. It is the lowest rate capable of preserving confidence in the dinar, the exchange-rate peg and foreign reserves without imposing an unnecessary financing premium on the economy. This issue has become particularly relevant under current conditions.

 

Jordan today has stronger external buffers than it did during many previous periods. Gross foreign reserves reached approximately $28.4 billion in August 2026, according to the Central Bank of Jordan. The IMF had estimated usable reserves at the end of 2025 at 132% of its reserve-adequacy metric, while dollarization remained low and confidence in the exchange-rate regime remained strong. Real GDP growth also reached 2.93% in the first quarter of 2026.

 

These indicators do not automatically mean that interest rates should be reduced. They do, however, make the following question legitimate: With buffers this strong, does the dinar require the same interest-rate differential it needed when reserves were weaker, and risks were higher?

 

The answer can be estimated empirically through what might be called a “time-varying minimum interest-rate differential.” We should not be looking for a single number that applies to Jordan in every year and under every economic circumstance. What matters is the interest-rate differential required by the prevailing economic conditions.

 

The author is a former Jordanian Minister of State for Economic Affairs.