Falling Interest Rates in ‘Lockstep’ with the Economy
The Central Bank of Barbados announces a further tightening of its monetary policy stance. The policy change will be applied to the Barbados Dollar securities reserve requirement ratio for commercial banks licensed under Part II of the Financial Institutions Act and it will be implemented in two phases.
Effective December 1, 2017, commercial banks will be required to hold 18% of their domestic deposits in stipulated securities. From January 1, 2018, commercial banks will be required to hold 20% of their domestic deposits in stipulated securities.
This is the second increase for the year and complements the fiscal initiatives introduced by the Minister of Finance in his Financial Statement and Budgetary Proposals earlier in the year.
The cash reserve requirement for commercial banks remains unchanged at 5%. The reserve requirements for deposit-taking trust and finance companies, and merchant banks also remain unchanged.
The news that commercial banks have significantly reduced interest rates on deposits has not come as a surprise to the BU household. Banks are reportedly paying any where from .01% to .25% on deposits. Clearly if banks are about creating shareholder value- like any good public commercial enterprise states as an objective- why do Barbadians expect the banks to pay interest on deposits if there is no avenue to lend excess funds?
When the central bank conspired with commercial banks to remove the minimum interest rate in April 2015 as a strategy to create demand for 5.5% yielding government savings bonds and reduce the cost of servicing domestic debt, the decision confirmed to BU, Wild Coot and a few others that the economy was in free fall read deep dodo. It appears Barbadians are not as bullish in buying savings bonds and credit unions, insurance companies and other non banking institutions have benefited from deposit placements.
One of the downsides to a protracted low interest rate climate is the impact on institutional investors. This is important in the Barbados context because of the limited options available to invest AND the role commercial banks play in the domestic market to satisfy the risk appetite of fund managers. It is no secret that the Barbados investment climate lacks sophistication and can be characterized as a closed market. Although credit unions are promoted as a viable option in the local market, the current legislative framework does not position the movement as a significant player, this is reflected in its asset penetration compared to the banking sector.
Earlier this year when the central bank increase the % of deposits commercial banks are statutorily required to hold to 20%, again Wild Coot, BU and a few others wondered about the response from the banks. Minister Chris Sinckler is on record confirming that the commercial banks have significantly reduced takeup of government securities ostensibly because of sovereign risk exposure linked to 20+ credit rating downgrades. By ‘forcing’ banks to hold more funds on reserve there was bound to be a price to pay for the extra-risk being carried by the banks. A reminder of Newton’s third law – for every action, there is an equal and opposite reaction.
Where do we go from here?
The market is in a hold position until the next general election is called. No significant decision will be taken by the market to inject significant investment whether local or foreign. Investment from Maloney/Bjerkham is the one exception given the fact they have replaced Leroy Parris and CLICO has the key campaign financier of the incumbent DLP government.
The possibility exist for banks to further signal discomfort to the market by introducing a negative interest policy.