Loan costs may go up

ONE week after its governor Dr Alvin Hilaire hinted at a possible increase in interest rates, the Central Bank has announced a 25 basis point hike to the repo rate, bringing it to five per cent. This means that personal loans, commercial loans, credit card rates, mortgages and vehicle loans could all rise.

The repo rate has been held constant at 4.75 per cent since December 2015.

The repo is the rate that the Central Bank charges commercial bank for overnight storage of excess reserves. Repo rates are also monetary policy tools to control the money supply: a high repo rate is used to reduce excess liquidity in the financial system in the short term, while a low rate is used to stimulate economic activity. Since the repo rate is effectively the borrowing rate for commercial banks from the Central Bank, it has an impact on domestic loan prices.

In mid-June, the Federal Reserve (Fed) raised US interest rates to between 1.75 per cent and two per cent; the last time US interest rates were above two per cent was in 2008, before the onset of the recession. The Fed said then that it believed the US economy had recovered enough that a rise in borrowing costs would not stifle economic growth.

In its Monetary Policy Announcement, the Central Bank singled out the negative interest rate differential between TT and the US—currently at -74 basis points—as one of the contributors to its decision.

“Rising interest rates in the US combined with relatively stable rates domestically have pushed the TT-US yield differential on three-month treasuries further below parity. The US Fed has signalled that further hikes are planned in the context of the solid US growth outlook. Should this materialise it could further widen the negative TT-US interest rate differential if domestic interest rates remain unchanged.” In other words, as the US interest rate increases while the TT rate holds steady, and the TT-US dollar exchange rate is held constant, the rate of return on a TT bond is negative compared to that of a US Treasury bond.

In his presentation at the bank’s launch of the Financial Stability Report, Hilaire said the global trend suggested growth. The bank’s monetary policy has been neutral so far, he said, but given domestic and international factors, “the pendulum is swinging towards a rate increase.”

“TT’s financial system remains very stable and the Central Bank is working on a number of fronts to deal with financial stability issues,” Hilaire said.

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