Rick Lowe
The Central Bank of The Bahamas lowered the Prime Rate by 0.75% to 4.75% a couple days back.
Former banker, Mr. Al Jarrett and other Keynesian's have been lobbying for this for some time on the assumption that it will save people lots of money and generate economic growth.
According to The Nassau Guardian, Mr. Jarrett said "the move should help many Bahamians to save their homes and assets, with some additional breathing room to service their loans."
Is Mr. Jarrett right?
While a lower prime rate is not a bad thing, it reduces the cost of borrowing, but does little to help the most people.
Take a car loan of say $25,000 at 10% over 5 years. The payment for this would be approximately $529 per month. Assuming an interest rate drop to 9.25%, the monthly payment becomes $520. A savings of $9 per month.
What impact would this have on a mortgage?
Payments for a mortgage of $150,000 at 14% over 25 years would be $1,806 per month. With the interest reduced to 13.25% for the same term, the monthly amount would be $1,720, for a monthly savings of $86.
The lower interest rate only allows people to keep a little bit more of their money, it's not enough to save a house or a car from foreclosure. Not nearly enough.
The former Chamber of Commerce President, Mr. Dionisio D'Aguilar suggested in The Tribune Business yesterday that the reduction would release some $60-$70 million back into the economy.
In the aggregate, it would appear the "release" of a large sum of money would generate spending but who knows what decisions individuals and businesses would make in this regard? Some might spend it. Others might save it, while some might leave it as additional principle payments. It is not to be confused with new money entering the economy like Foreign Direct Investment for example.
This also does not take into consideration those businesses, workers and retired individuals who will be receiving a little less interest on their deposits each month.
One positive aspect is it will mean lower interest payments by the public treasury on the national debt denominated in Bahamian Dollars.
In other words, it takes a lot more than 0.75% interest to make an economy grow.
You want my recommendations?
Curtail government spending, lower taxes, stop piling on regulations and wait.
What am I missing?
Greece had gotten two bail out because of Government spending by the European Union.Spain and Portugal have both Governments lost election to the Oppostion Party because of the bad economy and high unemployement.The Bahamas is a nation in a crisis with high crime rate that can impact the Bahamas economy,Tourism and Bahmain dollar devaluing.The Government borrowing is creating a real problem to the Bahamas economy and will not have any help or assistance like the European coutries.Which means the Bahamas is on it own and Tourism is very soft,revenue is down and the question is will the Bahamas soon be unable to pay it loans?We will know sooner or later.
Thanks for stopping by.
If one entity “benefits” in a big way from this it’s the Government.
They get a little breathing room from reduced interest payments.
Too bad it can’t be used to lower taxes.
Rick thanks for your comments and hope that the article that was in the Nassau Guardian Monday 7 June 2011 headline “Could there be a return to Gold Standard’.Would be on the WeblogBahamas to share with the readers it is a great article.Good job by The Nassau Institute.
Thank you very much. You can find the article on the gold standard here: http://www.nassauinstitute.org/articles/article981.php
The Government of the Bahamas along with the Central Bank announced the reduction of the prime rate by 75bps effective June 8, 2011. However, a number of commercial banks have not effected this change to the existing rates in the branch. Despite numerous email inquiries and visits, no one seems to be able to answer WHEN & WHY the rates haven’t been changed – – Not even the Head Office Manager.
Who are the regulators of the banks to ensure that the interest of the consumers are not overlooked here?? Can the banks DO AS THEY FEEL, DESPITE THE ANNOUNCEMENT OF THE GOVERNMENT?
I am certain if the prime rate had increased, consumers would have experienced the adjustment immediately. The same expediency needs to be displayed with the Prime Rate Reduction.