The monetary policy of either lower or no minimum interest savings rates could be affecting critical lending to businesses, a Barbados Economic Society (BES) study has suggested.
Presenting the research on Wednesday to an online banking and finance business forum, BES President Simon Naitram said it was clear that there was greater need for policymakers in Barbados and the Eastern Caribbean to better understand risks to commercial banks, and how they perceive those risks in order to better think about how monetary policies would trigger various outcomes.
Naitram said: This understanding can help us to make better monetary policy decisions with a clearer understanding of how it affects not just aggregate business lending, but also how it affects specific groups including low wealth individuals, and particularly a country like Barbados with a long history of wealth inequality.
“We are recommending the implementation of a credit condition survey by central banks in the region, close monitoring of banks’ risk perception… and also to understand how changes in interest rates might affect the economy.”
In April 2015, the Central Bank of Barbados removed the guaranteed minimum savings rate of 2.5 per cent, with the hope of more movement of cash out of the banking system and into investment.
Since May 2015, the Eastern Caribbean Central Bank has implemented a minimum savings deposit rate of 2 per cent.
But in line with the Barbados central bank’s finding over the past two years, Naitram said the research, Monetary Policy and Business Lending in the Caribbean, found that there has been slow growth in infrastructure and business development investment.
He said the research found a series of “quite concerning” developments: a decline in capital investment in the region leading to a decline in economic growth, a decline in banks lending to businesses, a reduction in minimum deposit interest rates resulting in an increase in risk premium on average, and eventually a fall in lending to businesses.
Naitram said while the spread between a decline in deposit rates should be commensurate with the decline in the interest rates on lending from financial institutions, this was not always the case.
“In fact, when the rates change we often observe that the spreads change as a result,” he said.
“Over time the spreads have either increased or decreased, and over time in different countries the spread will change in different ways. We observe that on average, when we lower the minimum deposit interest rate, the spread between lending rate and savings rate actually widens. That is to say, lending rates do not fall as much as savings rate do. So you will see a larger reduction in savings rate than the reduction in lending rate.”
He pointed out that the removal or lowering of the minimum interest rate often leads people to automatically lower their savings, according to the research.
With people consuming more of their income instead of saving it, this meant individuals would be less likely to start a business, and if they eventually do, they would require higher loans due to their lower savings, the UWI economics lecturer explained.
While central banks wanted to encourage greater lending, the analysis showed that “in reality . . . total loans are not changing but deposits are falling”, he added.
“This implies that increases in the spread leads to quite steep decline in the level of lending to businesses.
“It seems that a decrease in savings rate can lead to lower levels of productive business investment rather than increases in productive business investment, which is the expressed aim of the central bank policy.”
(marlonmadden@barbadostoday.bb)
