Coalition: How are interest rates being determined

Mon, Feb 17th 2014, 08:51 AM

A greater focus should be placed on the potential for all economic "tools", both fiscal and monetary, as a means of stimulating the economy in order to help address the country's deficit and debt problem, according to members of the Coalition for Responsible Taxation.Arguing that it is not clear how the institution is determining rates, which impact both how much it costs the government to borrow, what individuals pay on their loans, and how much savers and investors get in return, coalition member Gowon Bowe said that a better understanding of how monetary policy is created in The Bahamas and how it can best be used to stimulate the economy is needed.Bowe, a partner with accounting firm PricewaterhouseCoopers, along with coalition co-chair and businessman Robert Myers, and coalition members and Superwash President Dionisio D'Aguilar, said that while using the manipulation of interest rates as an economic tool may not be "as straight forward as we like it to be" there is no denying that The Bahamas should be looking at "taking all of our arsenal and putting them towards putting us back on the right track."Their comments come after Dr Jonathan Rodgers, a medical doctor and author of two books on the Bahamian economy, named the Central Bank of The Bahamas as the top obstacle to recovery in The Bahamas given its unwillingness to lower interest rates to stimulate the economy as central banks, such as the US Federal Reserve and the Bank of England, have done elsewhere since the global economic downturn.In an address to the Nassau Yacht Club last month, Rodgers said the Central Bank's "silence" on policy matters has been "deafening", and suggested that the institution should be made to justify its decision to hold the bank rate, which influences lending rates overall and the interest rate paid on government bonds, at the same level since 2011. He believes that the institution is influenced by financial institutions who would not find the lowering of rates in their commercial interest.Bowe said: "It is about having a greater appreciation of what is the monetary policy in The Bahamas and that's what we've been lacking from inception - what is actually determining the interest rate levels that are being set by the Central Bank? What is actually the discussion, dialogue, analysis, and the review of fiscal impact of change in the interest rates?""Why leave anything out of the equation? We should be saying that this is all (of the tools), now let's have an appreciation for how al these things interplay with one another and then what is the solution. It's not necessarily dropping the rates to what it is in developed countries but the question is, is that going to be a stimulus if we were able to do that?"And foreign exchange control - back in the day it was a significant concern in terms of the flow of money moving, so is that the same concern?"We have grown as a country, we are more advanced, we are more digitized, people have us dollars would it really prevent or hinder activity if we were to remove those controls. I'm not saying there is an answer but I'm saying we should be considering it," said Bowe.A negative side effect of lowering interest rates at the Central Bank, Bowe did add, would be reducing returns to pension plans and people invested in certain instruments.In his presentation on the economy and debt, Rodgers sought to address this by arguing that a minority of individuals benefit from these types of investments, whereas with a larger proportion of the population being more productive younger people, and borrowers, rather than savers, the overall effect would be a stimulus to the economy.A senior local financial services executive who spoke with this newspaper agreed, suggesting that while a lowering of the rates would cause pension and insurance companies to "scream bloody murder" it may be in the interest of the economy as a whole, as it would increase the amount of discretionary spending.Coalition co-chair Robert Myers agreed that the country should be using "all the tools in the tool box" to help right its fiscal imbalance, including monetary policy."There's all kinds of tools in the tool box to fiscal reform and interest rates are certainly one of those and the return of dollars is another one; if you eliminate exchange controls - and that's one of Rodger's tools in his tool box that he talks about, (the possibility) that there would be an inflow if people aren't told what they can do with their money, and there is a free movement - he feels there'd be more inflow that outflow and that creates more jobs here."If Bahamians or foreigners feel like they can freely bank Bahamian dollars as is the case in Cayman and, I think, Bermuda, then these are additional tools in the tool box," said Myers.Governor of the Central Bank of the Bahamas, Wendy Craigg, has not returned a number of emails and phone calls seeking comment on monetary policy matters.

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