Central Bank Of Barbados Cuts Local Interest Rates Again – Fearing Slowdown In Economy

       A week from today, next Tuesday, April 1, 2008, the minimum interest rate payable on deposits will be reduced by quarter of a percent, from 4.75% to 4.5% the Central Bank of Barbados said late week”any weakening in the economics of major trading partners will impact negatively on economic activity in Barbados”. 

 The bank  said  its  action  was  an  attempt to reduce the cost of doing business, especially for companies which are foreign exchange earners. The bank noted that with many forecasters projecting a slowdown in world economic growth during 2008 mainly due to the rise in oil prices, .” The reduction in the minimum deposit rate follows a similar action taken by the bank on November 19, 2007, when it was reduced from 5.25% per annum to 4.75% per annum.

When a central bank raises its key interest rate, it does so expecting that commercial banks will have to follow suit, thus encouraging people to save more and borrow less. The goal is to protect the foreign reserves.

For example, the last time the Central Bank of Barbados raised interest rates, on December 15, 2006, from 4.75% to 5.25%, it noted that despite four interest rate hikes the previous year, bank credit to the private sector was still expanding due to the strong demand for residential mortgages along with other borrowing, and, as a result, the net international reserves (NIR) had fallen.

A strong demand for credit usually leads to a higher level of imports and weakens the external current account when the amount of foreign exchange being used up is in excess of the amount the country is earning in a particular year. Raising interest rates is therefore a measure to shore up the balance of payments by slowing credit and hence imports.

Last January, in its review of the economy for 2007, the central bank noted that the country’s current account deficit improved in 2007 for the third consecutive year, ending the year at 6.6% of GDP, down from 8.1% in 2006 and 12.5% in 2005 and 10.5% in 2004.

However, as it tries to find the right level for local interest rates, the bank has already warned that the NIR will be under pressure this year due to an expected fall-off in foreign exchange earnings due to the Olympic Games in China and Barbados’ increasing import bill, which has been estimated by the Thompson administration at about $3.1 billion this year.

[Taken from Broad Street Journal}

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