The question may seem simple, but it is much deeper. The right question is not: should we follow the Fed or not? Nor is it: is the interest rate in Jordan high or low? But rather: what is the minimum interest rate differential between the dinar and the dollar that is sufficient to maintain the stability of the dinar, without imposing a higher financing cost on the Jordanian economy than necessary?
Pegging the dinar to the dollar does not necessarily mean that Jordanian interest rates must move point-for-point with US interest rates. Evidence of this is found in Jordan's experience. A recent IMF study on monetary policy in Jordan found that the response of the Jordanian interest rate to US interest rate movements was less than one-to-one, meaning it did not fully follow the US Federal Reserve's movements up and down. The study also found that the Central Bank was responding to local factors, most notably inflation and the output gap (the difference between actual and potential economic activity levels). This means that Jordan, despite pegging the exchange rate, has some monetary space, albeit limited and not fixed.
This finding helps us understand an important point that is often missing from the discussion on interest rates, which is that the interest differential required to protect the dinar is not a fixed number. When the economy is in good shape, economic growth rates are good, foreign reserves are strong, confidence in the dinar is high, dollarization is low, and inflows from tourism, remittances, and investment are good, the dinar does not necessarily need a significant interest rate premium over the dollar. Under such conditions, it is not just the interest rate that makes people and businesses hold dinars, but also confidence, stability, growth, availability of reserves, and external inflows.
However, when growth is weak, external inflows decline, reserves fall, or risks and uncertainties rise, the situation changes. Then the interest differential becomes more important, because holding dollars may become more attractive, and the dinar needs a larger premium to compensate for the risks and maintain demand for it.
The relationship we should look at is not: if US interest rates rise, Jordanian interest rates must rise by the same amount, but rather, the stronger the fundamentals of the Jordanian economy, the more stability of the dinar can be maintained with a smaller interest rate differential between the dinar and the dollar. And the weaker these fundamentals, the greater the need for a larger interest rate premium. It should be noted that growth is not the only factor. An economy may achieve good growth while reserves decline, external inflows deteriorate, or dollarization rises. Therefore, growth must be read with a set of indicators, not in isolation.
Jordanian history provides an important lesson. During the global financial crisis of 2008 and 2009, the Central Bank reduced interest rates, but not as quickly as the US Federal Reserve reduced its rates. As a result, the interest rate differential widened in favor of the dinar. The IMF noted at the time that this differential enhanced the attractiveness of dinar-denominated assets and contributed to the continued accumulation of reserves.
The Central Bank then gradually reduced interest rates as conditions improved, without leading to a collapse of confidence in the dinar. In fact, deposits recovered, and the share of dinar-denominated deposits continued to rise.
This is an important lesson because it tells us something more precise than saying that 'high interest rates protect the dinar'. Additional interest is useful when it is needed to protect the attractiveness of the dinar in difficult economic conditions, and provides very limited additional benefit, which may not be needed, when reserves are strong, confidence is high, and the economy is able to maintain demand for the dinar with a smaller premium.
From here, we can define a more useful concept of Jordanian monetary policy, which is the 'justified interest rate differential'. This is the difference between Jordanian and US interest rates that is justified in each period by the state of reserves, growth, dollarization, inflation, liquidity, the external account, inflows from tourism, remittances, and investment, and the level of risk, and then comparing this justified differential with the actual interest rate differential. If the actual differential is close to the justified differential, the monetary policy has achieved the desired balance between protecting the dinar and not imposing unnecessary costs on the economy.
If the actual differential is much higher than the differential justified by economic conditions, and for a long period, the difference between them becomes what can be called an 'excess interest rate premium'. This premium is not costless, as higher interest rates are passed on, to varying degrees, to the borrowing costs of companies and households, raising the cost of working capital, investment, and mortgage financing, and can slow credit growth. It also raises the cost of refinancing public debt and affects investors' decisions. As a result, we may reach a situation where we pay an additional economic cost for limited and faint additional monetary protection.
The goal is not to obtain the lowest possible interest rate, but to reach the lowest sufficient interest rate. The optimal interest rate for Jordan is not the lowest rate that the Central Bank can declare, but the lowest rate that can maintain confidence in the dinar, exchange rate, and reserves, without imposing unnecessary financing premiums on the economy.
This issue becomes more important in the current circumstances. Jordan today has stronger external buffers than in many previous periods. Gross foreign reserves reached about $28.4 billion in August 2026, according to Central Bank data. The IMF estimated usable reserves at the end of 2025 to be equivalent to 132% of its reserve adequacy measure, with dollarization remaining low and confidence in the exchange rate system strong. Real growth was 2.93% in the first quarter of 2026.
These indicators do not automatically mean that interest rates should be reduced. But they mean that the question is legitimate: does the dinar, in light of these buffers, need the same interest rate differential that it needed when reserves were weaker and risks were higher? The answer can be estimated economically to reach what can be called the 'variable minimum interest rate differential'. Because we are not looking for a single number that works for Jordan in all years and conditions. Rather, we are looking for the required interest rate differential.
