The economy is a mobile, sensitive and deeply interconnected system. It includes the production, exchange, distribution and consumption of goods and services. The availability of monies for investment, the rate of inflation and unemployment are all factors which affect the health of the economy. Interest rates, or the percentage annual (yearly) return (profit) on monies loaned, can be manipulated by governments and financial institutions to stabilize or keep economies healthy and to encourage the continued movement and production of goods and services.

In the United States, when the Federal Reserve changes the interest rates at which banks borrow money, those changes trickle through the rest of the economy. For example, if the Fed lowers the Federal Fund rate, then Banks can borrow money for less. They in turn can lower the interest rates they charge to individual borrowers, thus making their loans more attractive and competitive.

Lower interest rates make it easier for people to borrow in order to buy land, build homes and start new businesses. Purchases and building of homes increases the demand for other items, such as furniture and appliances, thus providing an additional boost to the economy. Lower interest rates mean that consumers spend less on interest costs, leaving them with more of their income to spend on goods and services. Lower interest rates also make it easier for farmers, manufacturers, fishermen and other businesses to borrow and invest in equipment, inventories and buildings. Increased business investment in turn makes the economy grow faster, as unemployment decreases and productivity or output per worker increases.

Since the start of the world’s economic crisis back in December 2007, large economies have been lowering their rates in an attempt to mitigate the ravages of the declining economic environment. In the USA the Federal Reserve Fund rate is 0.25%, in Japan it is 1.4%, UK it is 0.5%, in France it is 1%, in Canada it is 2.25% and in Australia it is 3.75%. Here in the Caribbean our prime rates vary from 8.5% in Dominica, Grenada and St. Kitts, to 12.25% in Trinidad and Tobago. In Anguilla it is 10%.

Despite the lowering of interest rates in other countries, our economic leaders, finance communities, banking fraternities, have not seen it fit to address the issue of interest rates in the region. Although there have been various meetings between Caribbean heads of government, Central Bank officials etc., there has been no discussion, to my recall, with respect to manipulating our interest rates downwards.

The banks may be reluctant to introduce these measures because it will affect their bottom line in the immediate short term, but if examined carefully we will see that if the banks were to play their proper role in trying to assist with the maintenance of a viable economy, lower interest rates will in the long term be in their best interest as well.

If interest rates remain high, as businesses are seeing less revenue, then the number of defaulters and foreclosures will increase. This will hurt the bottom lines of the banks far more than lower interest rates. If for example, borrowing $100.00 from the bank at 10% interest rate will mean a repayment of $10.00 in interest per year. If you cannot repay that interest amount in full, it will be added to amount owing and this situation could lead to the collapse of that borrower’s business, with resultant loss of jobs, loss of tax revenues to the government etc. With an interest rate of 5% however it is much more likely that that particular borrower could continue repaying their loans, thus ensuring their business remains viable and operational until the economy revives.
It is surprising and disappointing that no one is talking or taking the necessary steps here in the Caribbean at this critical time, to address our interest rates and to safe guard our businesses and thus the economy. In conclusion, I would like to urge our Government leaders, Central Bank and Commercial Banks to give some thought to this issue and take immediate action. They may not be in a position to print money and issue stimulus packages but, interest rates they can LOWER.
NAME WITHHELD AT WRITER'S REQUEST

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