THE RECENT DECISION by the Government to remove the minimum deposit rate is a curious one. It goes contrary to the Central Bank’s interest rate policy since its inception in 1972. The question is, why was the flooring on the deposit rate removed at this time?
According to a local authority on interest rate behaviour, “the public holds bank deposits to meet the ins and outs of day-to-day transactions, to maintain a reserve of liquid funds in case of unforeseen contingencies, to accumulate funds to finance large-scale transactions, and in anticipation of known commitments”. Very few deposits are held as a store of wealth for the depositors.
The conclusion that can be drawn from the observations of the authority is that the public does not hold bank deposits based on the interest rate being offered by the bank. If this is so, why did the Central Bank set a minimum deposit rate for 37 of its 43 years?
In fact, between 1973 and 1977, it fixed the maximum rate allowed on deposits. When the minimum rate to be offered on savings deposits was introduced, the bank also stipulated an average lending rate for selected loans. The latter was fixed for the majority of loans in the commercial banks’ portfolio; only lending to households and to Government was excluded.
In essence, the Central Bank was trying to influence the profitability of the commercial banks by manipulating the spread between the deposit and lending rates, while giving the depositors some rate of return.
It is obvious that when the minimum deposit rate is removed, the commercial banks have greater latitude to determine their profitability. This is because they will now offer a lower deposit rate to the public and indeed it could go as low as zero. However, lending rates will not fall especially on short-term loans.
Once again, the majority of the people suffer because of Government policy. Furthermore, there will still be a withholding tax on the interest earned on deposits.
Tax on assets
On the other hand, while the profitability of the banks will increase, so too will the taxes collected by the Government from the banks. Apart from the tax on profit, the commercial banks have been recently saddled with a tax on their assets.
In the circumstances, the Government has found a way to give relief to the commercial banks at the expense of the public that holds deposits. This is unbelievable, given what the public has had to endure over the last eight years with rising taxation and no real increase in salaries.
But the unworthy behaviour of the Government does not stop here. Having denied thousands of Barbadians interest on their deposits, it issued savings bonds as an alternative to deposits. The typical depositor is in no position to forego money for five years in the hope of earning interest of five per cent. While there is little risk of not being paid, the risk comes in the value of the money when it is received given the threat of inflation.
In December of last year, savings bonds were issued but they were not fully taken up. The question is, what has changed over the last five months? The answer is the lower deposit rates that have forced the public to look at the savings bonds.
While the interest rate on the savings bonds is attractive, the move speaks to the motive of the Government.
Part of the reason why the Central Bank is in its current financial condition has to do with interest rate policy over the last five years. Typically an increased demand for Government securities as observed since 2010 would have pushed up the interest rates. However, in its herculean attempt to keep down Government’s cost of debt servicing, the Central Bank deliberately suppressed interest rates. This affected the ability of the bank itself to make profit.
As a result of putting the Government first, the Central Bank staff have become the victims. It is now the turn of the public – they must accept less interest on deposits and put their money in savings bonds to help finance the Government’s fiscal deficit.
The Central Bank figuratively exhausted the printing press and having failed to attract buyers for savings bonds in December, went back to the drawing board and found another way to squeeze money out of Barbadians.
It is fascinating how Barbadians have hadto suffer at the hands of the Government.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy.
Email mascoll_clyde@hotmail.com.