There is no need for Barbadians to worry about getting extremely low interest rates on their savings.
This assurance has come from president of the Barbados Bankers’ Association Glyne Harrison, on the heels of yesterday’s announcement by the Central Bank that commercial banks and deposit-taking institutions would be responsible for setting their own interest rates.
Harrison told Barbados TODAY that any change in interest rate would be determined by a number of factors, including market conditions, and depending on those factors the interest rates could change quarterly or even monthly.
The Central Bank issued a statement yesterday informing that effective April 21, 2015 it would no longer set the minimum savings rate on deposits. It said the decision to allow the market to determine the rate was reached after careful consideration of the performance of the domestic financial markets.
It said that commercial banks were “obliged to provide customers one month’s notice before they may alter the existing rate”, which was set at 2.5 per cent.
While noting that it was difficult to say how low or how high a bank could go with its interest rates, Harrison said there was no need for customers to panic as this did not mean that interest rates would automatically fall.
“So it is not as simple as to say ‘let’s slash the rate’. It is a complex measure made up of different variables,” he said.
“So customers should expect from each bank some positive things because it is all about how do we move forward to get to a better place and every bank is having that conversation internally.”
He explained that in a market-driven economy such as Barbados the returns on savings accounts were primarily determined by the supply and demand for money.
“If you have a lot of liquidity in the system, meaning that there is a whole set of supply going on . . . which means the demand is low, you will find that you will tend to have lower rates. On the other hand, if the economy is booming whereby businesses are expanding and people are putting more money into infrastructure and buying new equipment, it means that there is a demand for money, which means the liquidity is sort of soaked up. Once that happens you will find that the interest rates will tend to peak upward. So the growth strength of the country will determine what the interest rates are and not necessarily that a bank will arbitrarily determine what to pay,” explained Harrison.
“So people need not be afraid that this change will automatically mean a rock bottom hitting interest rate . . . One institution can’t determine where rates will settle so there is a balancing set that will determine where rates will settle. But the immediate fear that rates are going to go to an extremely low point is not something that is founded. Over time things will settle out and you will see the benefits of this type of change coming into play,” he said.
In welcoming the Central Bank’s decision, Harrision said the move would allow commercial banks to be “more dynamic” in their rates decision given the uniqueness of their liquidity levels, investment and other portfolios.
“And the reality is that in the medium and long term it works to the benefit of the customer because the rates are no longer going to be just a rate that is sitting there. It is going to be an active rate driven by the market and its dynamics,” he said.
Barbados now joins at least two other Caribbean countries, Jamaica and Trinidad and Tobago, that have deregulated interest rates for savings accounts.