Bahamians with any question about when the Central Bank's discount rate reduction would impact them have their answer.  The Clearing Bank's Association (CBA) has announced a 75 basis point reduction in the prime rate.
Effective June 8th, the prime lending rate has fallen to 4.75 percent from 5.5 percent.  The news follows a policy signal from The Central Bank of The Bahamas that the discount rate was reduced from 5.25 percent to 4.5 percent, effective June 6th.
"Based on the action taken by The Central Bank of The Bahamas on June 6th, 2011 to lower the discount rate from 5.25 percent to 4.50 percent, the Clearing Banks
Association hereby advises that effective June 8th, 2011 the prime lending rate will be lowered from the present level of 5.5 percent to 4.75 percent," read a statement released by the CBA yesterday.
It means that variable rate loans such as mortgages, overdrafts and commercial loans with terms based on the prime rate will have to be re-priced.
Fixed rate loans, which include many consumer loans, do not fluctuate with the prime rate, typically maintaining the same origination rate throughout their lifetimes.
For many Bahamian consumers and businesses, it will make servicing variable rate loans an easier task, as arrears deepen across all time tranches.
Private sector arrears stood at around $1.2 billion at the end of April 2011, according to the Central Bank's most recent economic and financial developments report.  The arrears number had moved up 3 percent or $34.1 million in April.
T
he winners from the rate reduction will be borrowers.  The National Insurance Board (NIB), pension funds and insurance companies with future fixed payments to make will have to find alternative investments to meet their future obligations.  Portfolio managers will similarly be challenged to maintain or grow yields for their clients.
While the prime rate represents the best rate that borrowers may get from financial institutions, the discount rate represents the rate at which those financial institutions may borrow from the Central Bank.  With the current levels of liquidity in the system, Central Bank Governor Wendy Craig told Guardian Business on Monday that there has not been actual borrowing from the bank in some time.

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