Securing Your Future Is Our Main Investment

Updated: 28-03-2024 - 12:00PM   8 6 CLOSED

Financial News

Apr 2009 Financial News

Deposit rates dive

Apr 22, 2009

Deposit rates have taken a dive in Trinidad and Tobago.

An almost $3 billion build-up in excess liquidity in the local financial system has contributed to plunge in short-term interest rates in recent months.

Now, businesspeople and individual investors are reeling from what has been described as a "huge spread" between deposit and lending rates.

In its fixed income review last week, stockbrokers Bourse Securities Ltd said the resulting excess liquidity in the system arising from the slowdown of credit expansion, has caused short-term interest rates to decline substantially.

Commercial deposit rates have continued a downward spiral within past months, falling from more than six per cent.

The latest available data indicated that commercial deposit rates continued to fall with one-month and three-month deposits earning 2.15 per cent and 2.81 per cent respectively.

This was down from 3.58 per cent a month ago.

Bourse Securities pointed out that one-year deposits were currently earning 3.38 per cent, down from 3.69 per cent a month ago.

Bourse Securities said that a $1 billion bond issue would aid in mopping up excess liquidity, it was unlikely that interest rates would turn upward in the short term.

The Central Bank has also noted the decline in short-term rates.

In its Repo rate and inflation analysis earlier this month, the Bank noted that the three-month treasury bill rate declined by 296 basis points to 3.26 per cent in March from 6.22 per cent in January while the six-month rate fell to 3.88 per cent in March from 6.95 per cent in January.

Monetary policy faces the dual challenge of addressing double-digit inflation while trying to moderate the economic slowdown and contain the negative employment impact, the Bank stated, adding that in order to provide the signal for the lowering of bank lending rates, especially to businesses, it was reducing the Repo rate by 25 basis points to 8.5 per cent.

This prompted a slight reversal in the prime lending rate, with commercial banks announcing a reduction in the rate from 13 per cent to 12.75 per cent this month.

But this is not near to closing the gap between lending and deposit rates, businessmen in the country have said.

Nal Ramsingh, president of the Couva/Pt Lisas Chamber of Commerce, told the Business Express in a recent interview that interest rates were too high, particularly in the current environment where the effects of the global downturn were spreading into all corners of the Trinidad and Tobago market.

"Rates are too high, they should make it easier for small businesses," Ramsingh said in reference to commercial banks' interest rate spreads.

It is up to businesses to drive the economy but credit cards and lending rates were too high while deposit rates were too low, he said, adding that all around the world, banks were slashing interest rates while businesspeople in Trinidad and Tobago were still paying hefty rates.

The decline in domestic demand is partly reflected in the behaviour of credit markets, the Central Bank has said.

In the 12 months to January 2009, private sector credit by the consolidated financial system slowed to 8.4 per cent from 10.4 per cent in December 2008 and 18.4 per cent a year earlier.

Consumer credit has also declined to 3.4 per cent in January 2009 from 5.7 per cent in the previous month and 22.1 per cent in January 2008.

"Business credit has displayed a similar trend although it continues to outpace consumer credit expansion," the Bank noted.

President of the Downtown Owners and Merchants Association Gregory Aboud would also like to see rates adjusted.

In a recent phone interview with the Business Express, he described the Repo rate adjustment as a micro-reduction and said it was equivalent to 'trying to bail the boat with a teacup'.

He suggested that it was a mistake to believe that "micro changes" in interest rates over the next six to 12 months would have any effect.

"One only has to consider the spread between the current deposit rate and the interest rate to know that what we have done is to 'handcuff' the economy at a time when we need to restore confidence and enthusiasm in an effort to save jobs, particularly in the construction sector," Aboud said.

But Bankers' Association president Catherine Kumar last week suggested that it was not an easy situation for commercial banks either.

She told the Business Express that the main factor that led to the decline in rates was the excess liquidity in the system.

"It is so high right now and it is having an impact," she said of liquidity levels during a phone interview last Wednesday.

What so much money in the system means is that there are fewer opportunities for banks to lend money, she added.


Source:
Curtis Rampersad
Trinidad Express
Wednesday April 22, 2009

http://www.trinidadexpress.com/index.pl/article_business_mag?id=161467743