On the heels of The Bahamas being downgraded to "junk status" by credit ratings agency Standard & Poor's (S&P), The Central Bank of The Bahamas (CBOB) has decided, effective immediately, to reduce the discount rate - the interest rate charged by the Central Bank on loans to banks - a move that has not been done since June 2011.
The discount rate was slashed by 50 basis points and now stands at four percent.
The reduction, coupled with the regulator's expectation for financial institutions to follow suit with a corresponding reduction in the prime rate - the lowest rate of interest charged by commercial banks on loans to their best customers - from 4.75 percent to 4.25 percent, could auger well for consumers looking for new loans.
The bank said, "Interest rate reductions for existing facilities should be accorded in line with contractual provisions that govern the timing of such changes."
The cut is intended to position the domestic business sector to "take more advantage of growth opportunities" in the near to medium term, and "to provide more support to housing sector investments".
Underscoring the bank's decision was its consideration toward prospects for growth to "pick up" in 2017.
Expected growth prospects include "the expansion in the tourism plant and the potential for increased foreign currency inflows to buttress the external reserves".
"The economy also faces reduced pressures on the balances, given the significant reduction in the oil import bill, which is expected to be sustained in large part over the medium term," said the bank.
The regulator pointed out that, although the prime rate is expected to be reduced, "prudential constraints" would remain in place to "ensure sustainable credit trends".
"This includes the maximum debt servicing ratio limit of 40 percent to 45 percent (on the aggregate of personal loans, mortgages, rent and property maintenance) and the minimum down payment requirement of 15 percent for such loans," CBOB explained.
The temporary easing of those requirements in light of Hurricane Matthew "still only applies for hurricane recovery facilities".
The bank asserted that, "Lending policies should also continue to be conservative, as commercial banks manage the expected gradual reduction in the overhang of non-performing loans."
CBOB added: "The Central Bank would continue to closely monitor economic and monetary developments and will, where prudent, make further adjustments in its monetary stance in order to ensure the stability of the financial sector and contribute to sustainable economic growth.
"The bank will also continue to explore other interventions to increase the private sector's access to financing of a growth enhancing nature, having regard to activities that strengthen net foreign exchange earnings potential."

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