Central Bank of the Bahamas slashes discount lending rate to 4.5%

BY STEWART MILLER

Friday, June 10, 2011

BAHAMIANS can expect some relief in loan rates with The Central Bank of The Bahamas knocking 75 basis points off the discount rate, reducing it to 4.5 per cent earlier this week..

For Bahamians and local businesses it could translate into a lightened burden for servicing existing loans, and borrowing for future projects should be less costly. Several leading Bahamian businessmen said that the rate reduction is welcomed, even if late.

"I think it's long overdue in the sense that throughout the world and especially the western hemisphere the monetary policy response to the great recession was to lower interest rates in terms of providing additional stimulus to the economy," said former Minister of Finance James Smith.

"In The Bahamas it seems to have taken a very long time, but it is a welcomed position to take."

With this announcement, the Central Bank is expecting to see financial institutions drop the prime rate from 5.5 per cent to 4.75 per cent, adjusting their lending schedules accordingly. While the discount rate represents the rate at which banks would borrow from the Central Bank and is under its direct control, the prime rate represents the lowest rate at which money could be borrowed from licensed banks and financial institutions. Banks usually have about three months before they must implement any changes.

Bahamas Chamber of Commerce and Employers Confederation (BCCEC) Chairman Khaalis Rolle said that while the rate reduction will ease the burden for many, businesses would have benefitted more if the relief had come earlier.

"It is welcomed news however late it may be," Rolle said. "I think considering some of the factors involved in the condition businesses faced at the outset of the crisis, I would have liked to have seen this done sooner. But it's never too late."

Many businesses are struggling to recover from what Rolle described as "already out of control corporate borrowing issues", with not just the aggregate arrears continuing to mount, but the average number of days in arrears growing too. According to the Central Bank's April financial developments report private sector loan arrears were up $34.1 million or three per cent, to $1.17 billion that month. Arrears in the short-term tranche of 31-90 days were up 5.1 per cent or $24 million, while non-performing loans in excess of 90 days increased 1.5 per cent or $10.1 million.

Rolle does not feel that businesses will generally be in the position to borrow a lot, though he said many may still benefit from the restructuring of their existing loans to a lower rate, where they may not have had variable rates previously.

"It's not a silver bullet, but every little bit helps," Rolle said.

Smith said that from a business perspective, much of the lending that takes place is in the form of overdrafts, which should see a quick reduction as a result of the discount rate decline.

As it turns out, had the credit sector generally been in better condition, the discount rate may have remained unchanged. Central Bank Governor Wendy Craigg said that domestic credit, particularly in the private sector, is 'very mild'. With weak demand for credit, there is less pressure on the bank's foreign reserves to feed the additional credit demand.

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Central Bank of the Bahamas slashes discount lending rate to 4.5%