Nearly everyone in Barbados has intercourse with the banks.
I have been saying for the past three years that it was a mistake for Barbados to have followed the lead of the United States and Britain in lowering interest rates to the extent that they have done.
First of all, our economy is not based on manufacturing. If it were, a low interest rate would benefit the basic cost of production and hence the final product. It would also influence the downward price of exports. But Barbados’ are mainly the tourism and offshore industries and a low interest rate is not critical to these parts of our economy.
True that low interest would reduce the interest cost of hotels, but that is not critical because we could have influenced hotel expenses by changing their taxation.
What a low-interest regime has done is to deleteriously affect the performance of the banks. While their initial euphoria in 2008 meant profits in the benefit of the time lag, in the settling down of interest by the year 2011, they are now realizing that their spread is insufficient to handle their overheads. Trying to recoup so as to balance their books has only served to place the spotlight on their iniquitous rise in commissions and other spurious charges.
Our Central Bank appears powerless against their argument, as I have already said. Therefore the wider population must grin and bear it.
I said in a previous article that Government might be happy that interest payment on debentures and Treasury bills is low, but on the other side of the equation the general population is suffering badly at the consequential reaction of the banks. Remember the story of the frog and the little boy pelting rocks – what is fun for you is death for me.
I have been watching the published balance sheets of the banks and other financial institutions and invariably I have noted (a) the reduction in the “funds raised” caused by the low interest rates and harsh cost of living, since people are withdrawing their savings in an effort to survive; (b) banks report less earnings on their advances – their main income; (c) banks being a service industry cannot afford to present one cashier when the customer area is full or cause undue delays in sending off remittances. It would be difficult to cut experienced and trained staff.
The latest case of interest is the published accounts of the Barbados National Bank in Saturday’s May 7 DAILY NATION.
The report clearly showed that the low interest rates are affecting their interest received, mainly because of the rates that they are now constrained to charge. Operating expenses are progressively increasing, as March 2011 showed when compared to March 2010.
Banks are the intermediaries between the general public and money and while I have sedulously argued against high upward ”tics”, we must be careful that any prolonged losing trend will affect the decision of investors to stay or leave. Barclays left.
I still say, like the Governor of the European Central Bank, that a low interest rate causes inflation. Compounded with exogenous inflation, Bajans are sucking salt.
Now that the world price of oil has dropped nearly ten per cent in one week, we may see electricity rates drop commensurately. We expect that the alacrity with which increases in electricity matched a rise in oil prices will be equalled by an alacrity in reduction.
Again I say that the low interest rate is a basic mistake and that it has exacerbated our cost of living. Oh, ye stiff necks, listen!
Harry Russell is a banker.
