COLUMN – What after removal of minimum savings rate?

yourwealthourinterest-1The Central Bank of Barbados announced on April 7 that the bank would no longer set the minimum savings rate for banks and other deposit-taking institutions. I can only speculate on why this move at this time, like all the other ordinary Barbadians out there.

Undoubtedly, we know that this move will not see an increase in the savings rate, as the banks could at any point in the past increase the savings rate. One of my concerns is the assertion that the economy could not sustain a 2.5 per cent savings rate; which seems to be the most practical rationale for the Central Bank of Barbados removing the minimum savings rate.

So, yes, Barbadians should expect a lower rate, going forward.

The average savings rate is 1.44 per cent in Jamaica and 0.2 per cent for Trinidad (countries whose central banks similarly deregulated savings rates).

The numbers. The commercial banks have always chosen to simply set their savings rate at the minimum set by the Central Bank of Barbados from 1991. The average distance between the weighted average for deposits and the minimum savings rate between 1991 and 2014 was a mere 0.11 per cent. The banks never choose to compete for the public’s deposits, and this probably shouldn’t come as a surprise.

savingrates-1

The graph above shows the minimum savings deposit rate as set by the Central Bank of Barbados (in red) versus the average savings rate at the commercial banks (in green).

Source: http://data.centralbank.org.bb/InterestRates.aspx

The good news (short-term)? The glimmer of hope is that with this new deregulation one may see banks buying more Central Bank treasury bills, which the market has labelled as risky. The logic follows that banks having to pay their clients less (via savings rate) have more cash to lend.

The banks are unlikely to increase their lending to businesses in this environment. They are also unlikely to increase personal lending until unemployment numbers drop.

The banks are constrained by Central Bank requirements from investing overseas wholesale; thus the next logical option is to park the money at the Central Bank via treasury bills. Maybe that is the whole point of this exercise. Perhaps I am giving the Central Bank too much credit.

Normal course of action for investors:

(1) Do not keep huge cash balances idle in a savings account.

(2) Periodically, check the savings interest rate offered by competing banks.

(3) In case the difference in rates is substantial, it may make financial sense to shift banks (unlikely to happen because of structure of financial industry).

(4) Before shifting, also compare fees for banking services and minimum balances to be maintained,
and so forth.

(5) Often due to long-standing relationships, depositors get intangible benefits like increasing credit card limits quickly, and so on. In such cases, it is advisable to avoid shifting banks for small differences in the savings bank rates.
This is because the new bank may not offer these facilities immediately.

The hurdle to the above course of action is that an individual doesn’t have power over any bank. One individual switching bank accounts will not be noticed. If, however, many people were to actively switch banks, looking for “deals”, then the banks would have little choice but to compete.

This is highly unlikely, given the passive nature of Barbadians; but feel free to prove me wrong.

(Craig Harewood is the investment director at OurInterest Inc., an investment company that trades on global markets and from time to time assists small businesses and boutique investors.

To learn more about OurInterest’s financial products and receive financial tips, follow OurInterest on Facebook https://www.facebook.com/OurInterestINC. For access to our quarterly newsletters simply email info@ourinterest.org)

Disclaimer. These articles are intended to be general in nature and provide sufficient advice to change/promote the investment culture in Barbados. They are not meant to give specific investment advice to any one individual and the author does not accept any liability for investment deals made or any action taken as a result of reading these articles.

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