Apr 2009 Financial News

Repo reduction sends mixed signals

Apr 02, 2009

Scotiabank managing director Richard Young said yesterday that the Central Bank’s one-quarter percent reduction in the repo rate might not be sufficient to stimulate the desired economic activity the bank wants.

“I don’t feel that this is enough,” he said of the repo rate and added that a bigger reduction might be needed to get banks to move their current lending rates.

The repo rate is the rate at which Central Bank charges commercial banks to keep overnight funds, and is a key indicator of lending rates the banks set for customers.

The banks have set their lending rates at 13 percent.

He said the Central Bank was trying to fight inflation on one hand, but asking banks to lower lending rates on the other — a move which could stimulate demand.

“They are in a difficult situation,” he said.

In its overview of the economy last Friday in which it reduced the repo rate from 8.75 to 8.50, the Central Bank said with the slowdown in bank credit expansion, excess reserves in the financial system have increased to unprecedented levels.

In order to provide the signal for the lowering of bank lending rates, especially to businesses, the Central Bank said it was reducing the repo rate by 25 basis points to 8.50 percent.

The Central Bank also observed that the significant build-up in excess liquidity has impacted on short-term interest rates which have declined substantially in recent months.

“As yet, there have been no corresponding reductions in bank interest rates,” the Central Bank said.

Asked if this was a criticism of commercial banks in their lending policies, Young said he felt the Central Bank was putting pressure on the banks to lower their lending rates, and added that Scotiabank was not sure of its next move.

Young said if the commercial banks decided to reduce their rates and lending activity rose, then this could drive up inflation which now stands at 11.7 percent.

Like Scotiabank, other banks were adopting a wait-and-see approach.

Deputy managing director at Republic Bank, Gregory Thomson, said the bank was still weighing its options on reducing its lending rate. He said Republic was looking at the implications of the bank’s announcement. Like Young, Thomson said a .25 percent reduction in the repo rate might not have the impact the Central Bank wanted.

By trying to get banks to reduce interest rates, he said the Central Bank wanted to stimulate borrowing. But Thomson pointed out that the Central Bank was doing so in an environment where inflation was still high.


Source:
Thursday, April 2 2009
Newsday
http://www.newsday.co.tt/business/0,97771.html