In an effort to protect the banking sector from the fallout from the global financial crisis, the government extended its guarantee of all bank deposits until end-2010. Jordan's banking sector seems to have weathered the worst of the economic downturn, allowing the government to remove the guarantees in January 2011. Local banks have only limited exposure to the financial products that caused a raft of bank failures in the EU and the US. However, there are concerns that problems closer to home, primarily in Dubai, could create difficulties for Jordan's biggest bank, Arab Bank. Although Jordan's banks are well capitalised and have built up a precautionary cash pile over the past year, the government would be hard-pressed to prop up a bank of the size of Arab Bank if it did hit difficulty.

With domestic banks still reluctant to lend, and the spreads between commercial bank lending rates and its policy rate remaining wide, the Central Bank of Jordan (CBJ) has modified its generally conservative monetary stance. Citing an easing of consumer prices, it has reduced rates by 250 basis points since November 2008. The most recent cut was made in February 2010. This policy has been complemented by the decision to lower banks' reserve requirements. We believe that the Central Bank will keep rates low throughout 2011, but will shift its focus to an anti-inflationary strategy from 2012, in tandem with the start of rate rises by the Federal Reserve (the US central bank). However, given that banks have thus far not responded to government demands that they reduce their lending rates in line with CBJ cuts, commercial bank lending rates are expected to remain relatively constant throughout the forecast period, averaging 9% in 2011-15.