THE CENTRAL Bank of Barbados expects its current monetary policy related to interest rate increases to finally have an impact on credit demand in the fourth quarter of 2005.
The fourth such increase in interest rates will take effect from today, when the minimum rate of interest payable on deposits will be increased from 4.25 per cent to 4.75 per cent per annum. Despite earlier increases in deposits and loan rates, the Central Bank has noted that the high demand for credit from commercial banks has shown little sign of abating.
According to Central Bank Governor Marion Williams, the impact of the interest rate hikes will begin to be felt in the fourth quarter, as a result of the cumulative impact of several increases in interest rates throughout the year. Earlier in the year, the increases would have been incremental and by this month they would have increased by 2.5 per cent for the full year.
I think it should have an impact particularly on consumer spending, which is likely to increase towards the end of the year as a result of the Christmas season. Habitually we usually do have a significant increase in consumer spending in the fourth quarter, and, therefore, a considerable increase in credit. I am expecting that the interest rate increases will have some positive impact on slowing down the growth of consumer spending in the fourth quarter," he said.
CURBING CREDIT
Williams noted, however, that there is a cost associated with increasing interest rates and successfully curbing credit, and the Central Bank continues to monitor the impact of the rate hikes on the cost of doing business.
If credit is dampened through increasing interest rates, there is a cost to businesses. The cost of business can increase and, therefore the profitability of businesses can be affected. In a worse case scenario, which I imagine will not happen as we are monitoring the situation on a continuing basis, there could be an increase in defaults. We do not expect that this is going to be a problem, she stated. Commenting on the impact which preparations for Cricket World Cup (CWC) 2007 is having on government spending, Williams said that it is unrealistic to expect government to decrease its levels of spending and reduce the responsibility of the Central Bank to curb credit demand via interest rate increases.
"In the context of our commitment to CWC2007, I think that is an unrealistic expectation. In another scenario where we did not have those commitments I would have said that the need to slow the rate of spending could more have been shared between monetary and fiscal, but we have a commitment to CWC2007, we have to prepare, so I dont think that is an option given the circumstances."
Williams pointed out that international reserves remain very high at $1.15 billion, which is marginally below what it was last year,
"We would of course want to keep the reserves at that level, and given that we have CWC2007 expenses, and so on, to finance, which would have a foreign exchange component, some decisions will have to be made as to whether we should finance all of that expenditure out of the reserves, or whether we should finance some of it through borrowing."
- The Barbados Advocate
