Two weeks after hinting at the likely change, the Central Bank of Barbados has unveiled a new interest rate regime it said was partly intended to protect the funds of “small savers”.
Central Bank Governor Dr. DeLisle Worrell, who was part of a group of economists explaining the planned change in a recent policy paper called Central Intervention and Intervention and Interest Rate Policy In Barbados, announced the policy shift, which is to take effect on April 18.
“With the introduction of this policy, the minimum deposit rate will no longer be used for interest rate guidance. The bank will continue to stipulate a ‘minimum savings rate’ to be applied to the single purpose savings accounts of private individuals and non-profit organisations,” Worrell said.
“This rate is designed to partially insulate small savers against the erosion of the real value of their funds as a result of inflation. The minimum savings rate will remain at 2.5 per cent.”
The economist said in the new approach to influencing interest rates in the economy, financial institutions including commercial banks “will remain free to set all rates, other than the minimum savings rate”.
“Going forward the bank will from time to time intervene actively in the Treasury Bill market to influence the average rate at which the bills are sold. The coupon rates to be offered on all longer dated securities (Treasury Notes and Debentures) will be priced at an appropriate premium over the Treasury bill rate,” he explained.
“The bank will publish a quarterly notional yield curve on its website www.centralbank.org.bb to provide guidance to the market for issues of longer dated securities. Additionally, a bulletin of selected market statistics will be posted on the site to provide timely market intelligence.”
In their paper, Worrell and the other Central Bank economists had advanced the alternative interest rate approach, calling it a better fit to Barbados’ reality because it “better suits the circumstances of small open economies like Barbados, and is a practical alternative to conventional policy frameworks, which have been ineffective in producing the desired outcomes”.
“Conventional wisdom is that interest rates are a tool of monetary policy to be used principally in the control of domestic inflation. However, the scope of monetary policy to control inflation is limited in countries like Barbados, where perhaps 80 per cent of inflation is imported,” they said.
“It has been the experience in Barbados that monetary policy cannot relieve any pressure that might aggravate imported inflation; for instance, it will not achieve low domestic inflation rates in an environment where international oil and commodity inflation is high.
“Moreover, both theory and practical experience indicate that whatever impact interest rates may have on the availability of domestic credit and spending, is attenuated if local banks, firms and households have recourse to funds from abroad,” the Central Bank team added. (SC)