IN TYPICAL DISCUSSIONS about the performance and future prospects of the local economy, economists and other pundits usually raise eyebrows on trends in key macroeconomic variables such as growth, per capita income, unemployment, inflation, fiscal deficit, debt ratio and productivity. But these are not and should never be deemed the only factors of concern.
As recent history would show, the interest rate has now become a focal point in Barbados’ economic affairs and for a dreadfully excellent reason. Recall, in late 2015, the Central Bank granted full control of the setting of interest rates on deposits to commercial banks. Now, the banks are offering customers 0.5 per cent on deposits. What that has done is widen, in a significant way, the profit margin the commercial banks now enjoy on various lending activities, a phenomenon demonstrated empirically quite eloquently by my colleague, Dr Clyde Mascoll, in one of his weekly contributions to THE NATION. But, is the interest rate a critical factor or not in an economy?
To answer that question, let us turn to a February 12, 2016 article in the New York Times entitled: Negative 0.5% Interest Rate: Why People Are Paying To Save. The writer of the article, Neil Irwin, said this: “A decade ago, negative interest rates were a theoretical curiosity that economists would discuss almost as a parlor game. Two years ago, it began showing up as an unconventional step that a few small countries considered. Now, it is the stated policy of some of the most powerful global central banks, including the European Central Bank and the Bank of Japan.”
Arising out of that extract and taking into account the recent decision of the Central Bank to relinquish its traditional control over interest rates on deposits are these vital questions: Is Barbados heading in the direction of negative interest rates? Are Barbadians willing and able to pay to save in the prevailing economic conditions in the country?
But what precisely is the crux of the matter with the interest rate stance adopted by the Central Bank? To me, the fact that commercial banks can now borrow from the public at virtually zero cost suggests quite strongly that lending rates to individuals and businesses should decline given the huge profit margins now being enjoyed by these financial entities.
Further, the printing of money by the Central Bank and its subsequent injection into the financial system alongside close to a zero interest rate could potentially stimulate increased production, in a context where the people – the working and middle classes – have not been earning enough so as to increase demand for all the goods and services which need to be produced, for the economy to keep expanding. If that happens, then, logically, the interest rate has to be deemed a critical factor in the economic management of the country.
On the contrary, when zero interest rates proved insufficient to expand production to the level desired by those making the decisions, they may very well be persuaded to move to negative interest rates. The message inherent in this policy is: spend and/or invest your money, or see its value continue to fall! Under those dreaded conditions, interest rates can no longer be considered a critical factor in ensuring our thriving economic opulence!
Email: bfrancis@uwi.edu.bb
