The last time interest rates fell was September 2002 when the rate was reduced from 4 to 3 percent.
The eight OECS finance ministers, including Prime Minister Gaston Browne, who make up the Monetary Council of the ECCB, made the decision when they met in St Kitts & Nevis on Tuesday.
A former bank manager told OBSERVER banks will likely drop interest rates in line with the new minimum thus saving millions of dollars, once it is implemented.
However, Scotia Bank Country Manager, Gordon Julien said there is also good news for customers and the economy as banks will drop interest rates on loans.
Asked whether banks would simply keep the savings and not pass on any benefit to the customers, Julien said the competitive nature of the industry would not allow that to happen. “To the extent that all banks are realizing a reduction in the cost of funds, then competitive pressures would force a reduction in the lending rates,” Julien said. “Banks are not in the business of keeping money, banks are in the business of making loans, without the provision of credit, banks cannot be profitable,” he added.
The decision was made against the backdrop of long running complaints from banks about excess liquidity in the sector, which at the same time face a reduction in demand for loans.
The monetary council noted that in 2014 domestic credit contracted by 4.5 per cent after a 3.7 per cent decline in 2013.
“It’s in banks best interest to provide credit and not to keep the money. There’s a cost to liquidity, so keeping money in the bank and paying interest on those deposits is not helping any bank.”
He added, “There’s a vested interest in the banks in reducing the lending rates, insofar as they can afford to.”
Julien said in order for interest to be paid on savings, banks must invest deposits and earn a return.
“The stock in trade of most commercial banks in the Eastern Caribbean is really collecting deposits and granting loans,” Julien said. “Most banks tend to stay away from the other types of investment options available because these types of investments they may not be consistent or they may not fit in the bank’s risk appetite,” he added. “At the end of the day the funds that the banks invest does not belong to the bank, it belongs to the depositors, so banks have to be very prudent.”
The ECCB has not yet revealed a timeline on implementation of the reduced rates. Julien noted once implemented it would be a gradual process with the impacts expected to be felt within twelve months.
“In terms of how soon that decision is operationalized is left to be seen, I’m not sure what sort of administrative arrangement needs to be put in place before banks are allowed to reduce the rates.”
He added, “There’s certain contractual arrangements you don’t just reduce the rates on deposits overnight this thing is a gradual process it takes time.”