Concern over Central Bank’s removal of minimum rate
With the removal of the 2.5 per cent minimum interest rate by the Central Bank last April, there has been a noticeable impact on deposits and mortgages held with commercial banks.
Interest paid on deposits has now reached a record low of 0.5 per cent – the lowest in over 20 years – down from the 2.5 per cent minimum set by the Central Bank in 1991, while payments on mortgages have dropped from between seven to nine per cent to four to seven per cent.
While commercial banks have welcomed the move by Government and view it as a positive market development, economist Jeremy Stephen has warned Barbadians who are eager for a bigger return on their investment that there was unlikely to be an increase in the interest rates on savings unless the domestic economy starts booming again.
Consumer rights advocate Malcolm Gibbs-Taitt has also described the plunge in interest rates on savings as “ridiculous”, saying it struck him as “odd” when the Central Bank removed itself as the regulator.
With the change, an account holder who would have earned a dollar more in savings on the bank per month would wind up with 20 cents at the end of the month, based on the current 0.5 per cent interest rate, 80 cents less than what the customer would have received if the minimum interest rate of 2.5 per cent had remained in tact, based on our rough calculations.
Asked to comment on the situation, Stephen said given the current state of the economy, he was not surprised that either the savings or borrowing rates were presently low.
He explained that the matter was one of demand and supply, noting that over the past few years Barbadians generally seemed to have been anticipating a worsening of the economy and were therefore saving a lot more.
At the same time, domestic borrowing remains well below pre-recession levels, despite high liquidity in the banking sector, and in light of Government’s retrenchment programme in early 2014, commodity prices and wages were both stagnant.
Stephen therefore reasoned that the April 21, 2015 decision by the Central Bank to grant the “relief” was an attempt to encourage more loan activity in the form of mortgages and loans.
“You would only find mortgage rates going up and deposit rates going down when there is too much cash around and people are not necessarily risk takers but they are putting everything in the bank,” explained Stephen.
The move was announced a month before the Central Bank’s relaunch of its savings bonds programme with a nominal value of $10 million.
Stephen therefore suggests that the Central Bank’s removal of the minimum savings rate may have been intentional to “create an appetite” for the Government paper, which carried an interest rate of 5.5 per cent over a five-year period, and was quickly gobbled up.
However, President of the Barbados Bankers Association Glyne Harrison pointed out that even if the minimum interest rate remained set at 2.5 per cent, it would not affect the purchase of the Government’s savings bonds, given the higher rate of return.
In the meantime, Harrison was joined by at least one other banker in welcoming the current interest rate policy, which they described as reasonable and based on current market conditions.
“Given the times that we are in right now, [0.5 per cent on deposits] that’s what we offer, but I am sure should the tides change at any time we ensure that we change with the tides as well,” said Michelle Whitelaw, director of retail banking channels.
“When I speak about the tides you watch your market and you discuss and you also make sure that you review what the other banks are offering as well so that you remain reasonable. Our aim is to make sure that we are giving our clients the best for the monies that they do have confidence and deposit with us,” she said.
Asked if removing the minimum interest rate on deposit was a good thing, Whitelaw said, “It gives us more capacity and leverage.
“Not just with that interest rate but with the loans we are able to manoeuvre more with our loans and mortgage rates as well. So one works hand-in-hand with the other. So that removal also helped with the other side.”
However, the move is not sitting well with Gibbs-Taitt, director general of the Barbados Consumer Research Association (BARCRA), who has accused commercial banks of “doing what they like”.
“The banks did it because they are all powerful,” he told Barbados TODAY.
“The 0.5 per cent interest is quite ridiculous. Unless you have large sums of money like a $2 million . . . the bank is not interested in negotiating any upper interest rate with you. So if you have small amounts like I have, you just have to grin and bear the 0.5 per cent I guess or, as I would advise people to do, move whatever savings you have and put them into the credit unions,” he said.
Gibbs-Taitt strongly criticized the move by the Central Bank to issue savings bonds, saying “it meant that the Central Bank of Barbados, which is supposed to be the regulator, was now in competition with the very banks it was supposed to regulate in the first place”.
He said the savings bonds would then seem like a better option than the commercial banks and would give the Central Bank “a leg up” as it related to attracting savings.
Gibbs-Taitt, who strongly disagrees that the current 0.5 per cent rate on savings was mainly due to market conditions, said he did not see the sense in the extremely low interest rates compared to what it was prior to April last year.
He said BARCRA was expecting to have a meeting within another month to discuss a number of consumer-related issues including coming up with an education campaign to “alert consumers [regarding] the sense of remaining with the banks who are ripping them off”.