UNSATISFACTORY MARKET REACTION to interest rate policy has brought forcibly
to the attention of the Governor of the Central Bank, a view long held by the citizenry – moral suasion was not having the desired effect on interest rate policy, inter alia, of the commercial banks.

It was therefore no surprise to learn that Governor Marion Williams told commercial banks they should not expect any further reductions in the minimum deposit rates until they have made a commensurate reduction in lending rates.

The minimum interest rate
for deposits was dropped by 50 basis points
in December 2007 and again by 25 basis points in April 2008.

To date, there has been little, if any, downward movement in lending rates.

This is not unusual since it has been more the rule than the exception
for lending rates to show little response
to reductions in the minimum deposit rate levied by the Central Bank.

Of course, increases in rates attract swifter action.

What is perplexing is the fact that the commercial banks have proudly announced and almost in a chorus, increased spiralling growth in profits, year after year, but
yet feel justified in continuing to charge punishing rates of interest particularly
for credit card and consumer debt.

So high are the rates applied that examination of the average rate would
tend to lead one to a conclusion that their consumer portfolios not only make
a meaningful contribution to profits,
but perhaps also serve to subsidise corporate borrowings.

Monetary policy is the method by which the Government, Central Bank or monetary authority controls the supply of money, its availability and cost, all intended to ensure good management of the economy.

Given the state of the world economy
and the anticipated turbulence, in the face of high inflation which is likely to lead
to unemployment, it would seem prudent
to pursue a careful interest rate policy, one intended not to further exacerbate the already hostile economic environment.

With this in mind the Central Bank
of Barbados would have embarked on
a course of systematic and managed reductions of deposit interest rates to steady the economic climate and to soften the burden on the middle and lower classes
of society who, in the majority, are little able to cope with increased prices of gas, energy, food and other staples such as bread, milk, flour and animal feeds.

That the commercial banks failed
to reduce interest rates of loans was tantamount to offsetting the efforts of the Central Bank to keep the economy on an even keel, whilst holding the threatening recession at bay for as long as possible.

That five months could have elapsed without at least an almost corresponding reduction in lending rates, is inexplicable.

In such circumstances and in the absence of a clear willingness to make rapid response to interest rate reductions prescribed by the Central Bank, we just do not see how determination of interest rates, at least for the time being, could or should be left to the banks.