Feb 2006 Financial News

The Prime Lending Rate

Feb 02, 2006

THE ANNOUNCEMENT last week by First Citizens that it was increasing its prime lending rate from 9.75 percent to ten percent is yet another stage of the trend of a reversal of a few years ago when prime lending rates fell from 17 percent to eight percent.

Within recent weeks there has been an upward readjustment in the prime lending rate and although the percentage increase may not appear large, nonetheless there will be an all round negative impact. The cost of new and existing loans to the manufacturing sector will increase and provoke a domino reaction in which the cost of the sector’s products in the domestic and regional market place, as well as that of international exports, will rise. With the World Trade Organisation (WTO) forcing the lowering of tariff barriers, generally, and in the process opening up the Trinidad and Tobago. and regional markets to cheap manufactures, any increase in the prime lending rate, and with it the cost of capital, will make our goods and services less competitive.

And it is in this area, that of competitiveness of our manufacturers and products that the country will need to be most concerned. The halving of the prime lending rate a few years ago allowed manufacturers the opportunity to acquire loans at an attractive eight percent and enabled them to acquire new and needed technology and effect a reduction in labour costs. The two percent upward adjustment in the rate from its low of eight percent may yet nudge them, in the interest of survival, and before it rises further, toward a continuing of this policy.

Meanwhile, even as the eight percent prime lending rate allowed the manufacturing sector, indeed the business sector as a whole, and the consumers, to borrow and spend more, with the consumers better positioned to effect purchases, the increase, and we emphasise that it has been necessary, may discourage the greater level of consumer spending that came with low cost borrowing.

There were pluses and minuses that were generated by the cheaper loans. The low cost borrowing facilitated the purchase of a greatly increased number of shares of companies, both domestic and regional, listed on the Trinidad and Tobago Stock Exchange. This allowed these listed companies, whether manufacturers, producers, insurance companies and/or commercial banks to expand. At the same time nationals had a greater stake in publicly owned and listed companies and reaped annual dividends, while at the same time, depending on the spread of the companies, contributing to the increase in the number of employment opportunities both locally and regionally.

But there were minuses, including the increased purchase of foreign second hand cars and other vehicles and with this the consequent impact on the country’s needed foreign reserves. In addition, the relatively high number of registered vehicles on the roads of Trinidad and Tobago, approximately 500,000, has led to horrific traffic jams and a consequent loss of production both on the job and in the classroom, what with scores of workers and schoolchildren reaching to work and school late. For the time being, at least, the increase in the prime lending rate is not likely to impact negatively on the cost of mortgages This is, principally, because merchant banks and trust companies all of which have a lower reserve requirement than banks, and thus are in a position to offer somewhat more competitive rates of interest, handle mortgages. Nevertheless, should the prime lending rate continue its upward climb, and ipso facto (continue to) send up the cost of borrowing then, undoubtedly, there will be an evential increase in the cost of housing loans.


Newsday
Business Day
Thursday, 2nd February, 2006.
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