BU read Dr. Clyde Mascoll’s weekly column with great interest. The fact that it has not garnered any serious critique on the talk shows and on social media says a lot about our level of discernment. An advantage over the traditional media is that we (social media) tell it like it is.
Last week the BLP member of parliament for St.James North Edmund Hinkson made the attention grabbing request for Minister Denis Lowe to repay the state the financial loss suffered as a result of his error in judgement concerning the NCC workers matter. To add to Hinkson’s call the BU household calls on the commercial banks of Barbados to redistribute the profit to customers collected as a result of the Governor of the Central Bank Delisle Worrell removal of the minimum savings rate commercials banks had to pay their customers.
Read Mascoll’s column to understand how one of the biggest scams in our post Independence history is being perpetrated on Barbadians. Now go and buy some savings bonds!
WHAT MATTERS MOST: The interest rate gap
CLYDE MASCOLL,
Added 20 October 2016
THE LATE PROFESSOR Roland Craigwell once told me that “a man who has time to read is a dangerous man”. It was his way of emphasising the need to read almost everything in an area of study if you want to present your case.
Those words never stopped resonating with me. He reinforced the need to never go public with anything on the economy, unless I have verified the evidence. In this vein, I read all that I can on issues in the Barbados economy. This requires reading material from the distant past.
There are two issues that engaged me over the last weekend: (1) the increasing gap between loan rates and deposit rates, and (2) the ongoing printing of money that some still want to deny.
In its most recent economic press release, it was noted that the financing needs of the Government had widened the gap between the United States and Barbadian treasury bill rates.
The Central Bank attempted to narrow the gap by intervening in the treasury bill auction after the commercial banks were allowed to set the minimum deposit rate. The concern now is “since April 2015, commercial banks have lowered their deposit rates more substantially than their loan rates”.
First of all, why was the Central Bank trying to narrow the gap between the two rates? There is no good economic reason why the local treasury bill rate should mimic that of the United States.
Why should the widening interest rate spread surprise anyone? This caused me to read material from the past. Worrell (1997) identified powerful reasons why the Central Bank should lead on changes in interest rates. He suggested that “it is the most fully informed, being the repository of a wealth of data, producing the most comprehensive assessment of the economy and maintaining constant economic oversight”.
In analysing interest rate spreads in the past, he noted in periods of Central Bank regulation, they widened. He concluded that the Central Bank “was never able to persuade the banks to agree on narrower spreads and was wisely never willing to risk evasion by defying the banks’ wishes”. So what has changed to expect the banks to act differently now?
On the second issue, Worrell (1997) wrote that “the Central Bank of Barbados was concerned from its inception with the need to avoid money creation [printing of money] through lending to Government”. He also stated “there is no problem of excessive money if banks are happy to leave excess cash with the Central Bank at no interest rate, as they have for extended periods in countries that have stable exchange rates”.
There is evidence that the banks have been leaving excess cash with the Central Bank, which it is using to help finance Government spending. For example, Government needed $273 million in domestic financing between April and June. It received $92 million from the National Insurance Scheme and the private sector not including commercial banks. In fact, the banks reduced their lending to Government by $120 million over the quarter.
As a result, the Central Bank had to provide $301 million in financing to the Government. It did so by using the commercial banks’ additional deposits with the Central Bank of $198 million for the same period April to June. This means that the Central Bank had to print money to the tune of $103 million.
Why did the commercial banks reduce their lending to Government but still put additional deposits at the Central Bank? In the face of excess cash, there is still a problem with financing Government spending from domestic sources.
Why is the Central Bank holding $775 million in treasury bills and $592 million in debentures? The Central Bank is using the commercial banks’ deposits and the printing of money to purchase Government securities. Worrell (1997) also found that “in circumstances where banks were not actively seeking to employ excess cash, the Central Bank has never been able to effect a sale of bills by offering a more attractive return on them”.
In the current circumstances, the Central Bank has become too big a player in the treasury bill market and therefore the banks are prepared to take advantage of the low deposit rates. This is done by widening the spread, while the loan rates are slightly more attractive.
The Central Bank has tried to use monetary policy to accommodate fiscal madness. There is scope for monetary policy to support fiscal adjustment that is well thought out. It cannot correct fiscal adjustment that is inappropriate and insufficient.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email: clyde_mascoll@hotmail.com
The blogmaster invites you to join the discussion.