Friday, August 13, 2010

Why won't interest rates come down?

FOR years I have listened to many people discuss why the banks won't reduce interest rates, even going as far as saying how cruel the banks are, and even referring to them as extortionists. This sort of argument has received traction from not only the man in the street but even supposedly intelligent persons who should better understand what determines interest rates.

More recently the Government, through the Minister of Finance, has been pursuing policies to create a more facilitative environment to encourage the reduction of interest rates generally. After all, talk alone was never going to do the trick, as the banks were faced with a choice of (1) lending (at a risk) to the private sector -- in the face of high crime, decreasing real income, relatively high inflation, etc; or (2) placing money on government paper, at a relatively high return (with little risk). The choice for any prudent person would have been obvious.

Breaking the cycle
So the only way to have broken that cycle was to effectively reduce the return on government paper, which could only have been done by (1) in the short term, restructuring government debt; (2) in the medium term, sustaining that restructured debt by focusing on prudent fiscal management; and (3) in the long term, causing economic development to happen. The first one was easiest to do -- and was necessary although many could not see it at the time; the second is easy in the short run, but more challenging to sustain; and of course, the third is always going to be very challenging. In order to succeed in all three, a set of economic and social policies would have to be put in place or else we would see short-term gains followed by more severe pain. But this is not the topic being discussed so I will move on.

Shaw and his team have been doing all that they can in the drive for lower interest rates. All they can realistically do is create the environment for reduced interest rates, but can do no more besides plead with the banks to reduce rates at a pace they would like to see. Well, there is one more thing they can do, which is to encourage greater competition in the lending market. This has its own inherent risks, but my own belief is that a well managed and thought-out strategy would have the desired effects while reducing the inherent risks.

Interest rate determinants
Back to the question at hand, though — why won't interest rates come down? The truth is that we have started to see interest rates coming down; however, it will not be at the pace we would like for a number of reasons:

1. The first is that our lending market is not competitive enough, and I believe that this is a policy that government must pursue: (a) to enable the consumer to get the best price for money and (b) to enable further development of the capital market. This must, however, be carefully managed and implemented;

2. Interest rates are the price of money, and are determined by demand and supply. Even though rates offered on government instruments have come down, there is still a relatively high demand for funds by the government. The solution to this is to either increase the supply of money or reduce the demand for money by government. The first has other risks associated with it and the latter takes time;

3. Because of the reduction in real and disposable incomes, and the hardships being faced by many businesses, the risk associated with lending has increased. Therefore, even though people may be demanding money, the bank needs to assess the risk to ensure they can be paid back over the life of the loan. So it is a chicken and egg situation, in that while the loans are needed to jump-start the economy, the fact is that the risk is high because income has declined. One of the ways to deal with this is for equity to be injected initially by government, for example, in terms of direct equity stake or interest subsidies. One other major determinant of risk is predictability about government policies and crime;

4. Many people also have sound ideas but do not have the proper due diligence evidence, for example, projections and a business plan. Banks assess projects based on independent assessments. So a business plan done by a well-known and independent accountant, for example, carries less risk than one done by a connected party;

5. Interest rates are determined also by the relative value of currencies. So to see lower interest rates we might have to see a stronger Jamaican dollar versus the US dollar, all other things being equal, but this also depends on the balance of payments situation, as currency values can only consistently improve if productivity and the trade balance improve. If these factors get relatively worse then it means the currency will depreciate and the way to maintain stability may be to increase interest rates;

6. Within the financial institutions themselves, I do not believe that they have yet made the skills set transition. Many of the ads that come out still focus on non-productive loans -- for example, it seems a bit futile to me to be promoting motor car loans when that market is destined to decline. Why swim against the tide? [There is one financial institution that has made a transition, and I think now is the time to buy their shares]. Another indicator to me is that, unlike in the US, there is not a great emphasis on the skills set to be able to analyse and predict what will happen in the economy. In the US, for example, banks invest a lot in the resources that can predict what will be the likely out turn in the economy. If you can reasonably predict economic outturn then you can prepare your company for the future. I am aware of some companies that have done that, but I don't see the public display of it by the local banks.

This is by no means an exhaustive list but it illustrates the factors that go into determining interest rate levels. What this shows, though, is that there is very little that the Government can do besides create an environment to encourage interest rate reduction. The Bank of Jamaica and the Ministry of Finance could reduce interest rates to zero if they wanted to; the fact is that this does not necessarily translate into lower commercial lending rates. This was clearly demonstrated in the US, where the Federal Reserve decreased interest rates to near zero, but even then yields and commercial rates were still relatively high.

I believe that from the fiscal management point of view that environment is already emerging from the policies being implemented. And I say 'emerging', as the key to the fiscal management programme is going to be sustainability, and government will have to demand less money, even at lower rates. The next most effective government policy is the encouragement of greater competition in the market. After all, it is this sort of effect that has caused banks to be reducing interest rates, not because they care about their customers. Default on your loan and you will see how far that "care" takes you. And there is nothing wrong with that. The private sector should be motivated by profit, not benevolence.

So when the question comes up again, why won't interest rates come down? The answer must be that it is because there are many determinants to interest rate levels, and that it is really nothing more than the price of money. So anyone who believes that the price of money is too high, then maybe they would not be averse to reducing the price on their own goods, as, given the reduction in disposable income, the price of goods has also become too high.


Anonymous said...

An interesting discussion is definitely worth
comment. I do believe that you need to publish more on this topic,
it may not be a taboo subject but typically people don't discuss such topics. To the next! Cheers!!

Also visit my web site ... filing bankruptcy in florida

Anonymous said...

Hello, I want to subscribe for this webpage to take most recent updates,
thus where can i do it please help.

my weblog: diets that work for women

Anonymous said...

Just want to say your article is as amazing. The clearness in your post is just great and
i can assume you're an expert on this subject. Fine with your permission allow me to grab your feed to keep up to date with forthcoming post. Thanks a million and please carry on the rewarding work.

Here is my web blog: diet plans for women to lose weight fast

Anonymous said...

Everything is very open with a clear explanation of the issues.

It was really informative. Your website is very useful.
Many thanks for sharing!

Here is my webpage; Safe Diet Plans

Anonymous said...

Hi! This is kind of off topic but I need some advice from an established blog.
Is it tough to set up your own blog? I'm not very techincal but I can figure things out pretty fast. I'm thinking about setting up
my own but I'm not sure where to start. Do you have any tips or suggestions? With thanks

Stop by my webpage - what should i weigh

Anonymous said...

Nice post. I was checking constantly this blog and I am impressed!
Very useful information specially the last part :) I care for such info much.
I was seeking this particular information for a very long time.
Thank you and good luck.

my web blog - diet plans for women to lose weight fast

Anonymous said...

Wow, incredible blog format! How long have you been
blogging for? you made running a blog glance easy.
The entire look of your website is excellent, let alone the

my blog post - waist to hip ratio chart

Anonymous said...

Wow, amazing blog layout! How long have
you been blogging for? you make blogging look easy.
The overall look of your site is great, as well as the

Take a look at my website; diets that work fast

Anonymous said...

Thanks to my father who told me about this webpage, this webpage is in fact remarkable.

Also visit my web-site diets that really work

Anonymous said...

I'm very happy to discover this site. I wanted to thank you for ones time just for this fantastic read!! I definitely appreciated every bit of it and I have you book marked to look at new stuff in your website.

Feel free to visit my website - How to lose weight fast

Anonymous said...

If you desire to get much from this post then you have to apply such strategies to
your won website.

Feel free to surf to my webpage essay term papers

Anonymous said...

When I initially commented I seem to have clicked on
the -Notify me when new comments are added- checkbox and from now on each time a comment is added I recieve 4 emails with the same comment.
Perhaps there is an easy method you can remove
me from that service? Thanks!

Also visit my page; thesis statement for research paper

Anonymous said...

Inspiring story there. What happened after? Good luck!

My blog - 7th grade research paper topics

Anonymous said...

Highly energetic blog, I liked that a lot. Will there be a part 2?

Also visit my page: anime t-shirts wholesale

Anonymous said...

Thank you for the good writeup. It in reality used to
be a amusement account it. Glance complicated to far introduced agreeable from you!
By the way, how could we keep in touch?

Feel free to surf to my web page ... research papers on education

Anonymous said...

Its like you read my mind! You appear to know so much about this, like you wrote the book
in it or something. I think that you could do with some pics
to drive the message home a bit, but instead of that, this is magnificent blog.
A fantastic read. I will definitely be back.

Check out my web page :: research paper thesis examples

Anonymous said...

Generally I don't read post on blogs, however I wish to say that this write-up very pressured me to try and do it! Your writing style has been amazed me. Thank you, very great article.

my site ... childhood obesity research paper

Anonymous said...

Excellent post. I definitely appreciate this site. Continue the good work!

Feel free to surf to my blog literature term paper

Anonymous said...

There is certainly a great deal to learn about this issue.
I like all of the points you made.

Feel free to surf to my website killer movie forums

Anonymous said...

Hey very nice blog!

Feel free to surf to my blog; custom assignments

Anonymous said...

Thank you for the good writeup. It in fact was a amusement account it.
Look advanced to far added agreeable from you! By the way, how can we communicate?

my blog post - bugs bunny t-shirts men

Anonymous said...

It is the best time to make some plans for the future and it is
time to be happy. I have read this post and if I could I want to suggest you few interesting things or tips.
Maybe you could write next articles referring to this article.
I want to read even more things about it!

Have a look at my site :: white pages directory business

Anonymous said...

Write more, thats all I have to say. Literally, it seems as though you relied on the video to make your point.
You clearly know what youre talking about, why throw away your intelligence on
just posting videos to your site when you could be giving us something enlightening to read?

Look at my web page - Charlotte buy computers

Anonymous said...

Hiya very nice website!! Guy .. Excellent .. Wonderful .

. I will bookmark your site and take the feeds also? I am happy to seek out so many useful information here within
the publish, we'd like develop more strategies in this regard, thanks for sharing. . . . . .

Look into my site ... Charlotte computer repair

Anonymous said...

Hello there, just became aware of your blog through Google, and
found that it is truly informative. I'm going to watch out for brussels. I'll appreciate
if you continue this in future. Lots of people will be benefited from your writing.

Feel free to visit my blog post - sample of a research paper

Anonymous said...

Hi there everyone, it's my first go to see at this site, and article is really fruitful in favor of me, keep up posting these content.

my web page :: local real estate agencies

Anonymous said...

hello there and thank you for your information – I've certainly picked up something new from right here. I did however expertise some technical issues using this site, since I experienced to reload the site lots of times previous to I could get it to load properly. I had been wondering if your web host is OK? Not that I am complaining, but sluggish loading instances times will often affect your placement in google and can damage your quality score if advertising and marketing with Adwords. Anyway I am adding this RSS to my e-mail and can look out for a lot more of your respective interesting content. Ensure that you update this again soon.

Also visit my web page - topics for research paper

Anonymous said...

Its like you read my mind! You appear to know so much about this, like you wrote the book in it or something.

I think that you can do with some pics to drive the message home a
little bit, but instead of that, this is great blog.

An excellent read. I'll certainly be back.

Also visit my web page - buying research papers online

Anonymous said...

We are a group of volunteers and opening a new scheme in our community.
Your web site provided us with valuable info to work on. You have done an impressive job
and our entire community will be grateful to you.

Review my homepage - online real estate directory

Anonymous said...

I've read a few just right stuff here. Definitely price bookmarking for revisiting. I surprise how much effort you put to make the sort of wonderful informative web site.

my homepage business yellow pages

Anonymous said...

Informative article, just what I was looking for.

Also visit my web site - local business yellow pages

Anonymous said...

This website was... how do you say it? Relevant!
! Finally I have found something that helped me.
Appreciate it!

my blog - internet term paper

Anonymous said...

When I initially commented I clicked the "Notify me when new comments are added" checkbox and
now each time a comment is added I get four e-mails with the same comment.
Is there any way you can remove people from that service?
Appreciate it!

Feel free to visit my web site ... research paper on down syndrome

Anonymous said...

Hello there! Do you know if they make any plugins to safeguard against hackers?
I'm kinda paranoid about losing everything I've worked hard on.
Any recommendations?

Look at my web-site local white pages

Anonymous said...

Link exchange is nothing else however it is just placing the other person's website link on your page at proper place and other person will also do same for you.

My site :: business lisitngs

Anonymous said...

What's up, this weekend is pleasant for me, for the reason that this time i am reading this fantastic educational piece of writing here at my house.

Here is my site :: business local directories

Anonymous said...

I'm gone to inform my little brother, that he should also go to see this web site on regular basis to get updated from most recent reports.

Also visit my website :: english research paper example

Anonymous said...

What you published was actually very logical. However, what about this?

what if you added a little content? I am not suggesting
your information is not solid., however what if you added a post
title to possibly grab folk's attention? I mean "Why won't
interest rates come down?" is kinda plain. You should look at Yahoo's front page and watch how they create article titles to grab people interested. You might try adding a video or a picture or two to grab readers excited about everything've written. In my opinion, it might bring your posts a little livelier.

Feel free to surf to my web page: apa style research papers

Anonymous said...

Great post. I was checking continuously this blog and I'm impressed! Very helpful information specifically the last part :) I care for such information much. I was seeking this certain information for a very long time. Thank you and good luck.

My homepage; local yellow pages directory

Anonymous said...

Awesome things here. I'm very glad to look your post. Thanks a lot and I'm
looking forward to contact you. Will you please drop me a e-mail?

Look into my web blog - business submit site

Anonymous said...

Wonderful goods from you, man. I've take into accout your stuff previous to and you're simply
extremely magnificent. I really like what you've obtained here, certainly like what you are saying and the way in which in which you assert it. You're making it entertaining and you still take care of
to keep it smart. I can not wait to read much more from you.
This is really a tremendous website.

Feel free to surf to my site :: research paper on literature

Anonymous said...

Does your blog have a contact page? I'm having a tough time locating it but, I'd like
to shoot you an email. I've got some ideas for your blog you might be interested in hearing. Either way, great site and I look forward to seeing it expand over time.

my website: essay research paper

Anonymous said...

Ahaa, its pleasant discussion about this article here at this web site, I have read all that, so at this time me also commenting at this place.

Also visit my web page: examples of introductions for research papers

Anonymous said...

I am curious to find out what blog platform you are utilizing?
I'm having some small security issues with my latest website and I'd like to find something more risk-free.
Do you have any solutions?

my website :: small business directories

Anonymous said...

Oh my goodness! Amazing article dude! Thank you so much, However
I am going through issues with your RSS. I don't understand the reason why I am unable to join it. Is there anybody getting the same RSS issues? Anybody who knows the answer can you kindly respond? Thanx!!

Also visit my website directory businesses

Anonymous said...

Hey! Someone in my Facebook group shared this website with us so
I came to give it a look. I'm definitely loving the information. I'm book-marking and will be
tweeting this to my followers! Superb blog and fantastic style
and design.

My page; Charlotte computer repair

Anonymous said...

Hi there, I log on to your blogs on a regular basis.
Your humoristic style is awesome, keep up the good work!

Also visit my web site acid reflux remedies

Anonymous said...

It's very effortless to find out any matter on web as compared to books, as I found this paragraph at this web site.

Feel free to surf to my homepage ... colon cleansing diet

Anonymous said...

Its such as you read my mind! You appear to grasp a lot
approximately this, such as you wrote the guide in it or
something. I believe that you just can do with a few percent to power the message house
a little bit, however other than that, this is excellent blog.
An excellent read. I will certainly be back.

Feel free to visit my web page: Slim Helper

Anonymous said...

Its like you read my thoughts! You appear to grasp a lot about
this, such as you wrote the guide in it or something.

I believe that you just can do with some p.c. to pressure the message home a bit,
however instead of that, this is fantastic blog. A fantastic read.
I will certainly be back.

Also visit my homepage: paper writing

Anonymous said...

Excellent blog here! Also your website loads up very fast!
What host are you using? Can I get your affiliate link to your host?
I wish my website loaded up as fast as yours lol

my homepage ... real estate web directory

Anonymous said...

Excellent post. I was checking constantly this weblog and
I'm impressed! Very helpful information specially the final phase :) I handle such info a lot. I was seeking this particular information for a long time. Thank you and good luck.

Stop by my website: NC computer repair

Anonymous said...

Your style is unique in comparison to other people I've read stuff from. Thanks for posting when you've got
the opportunity, Guess I will just bookmark this blog.

Here is my web-site buy computers charlotte north carolina

Anonymous said...

I enjoy reading an article that can make people
think. Also, thank you for allowing for me to comment!

Here is my website - gaming t-shirts gamer

Anonymous said...

I visited multiple web sites however the audio feature for audio songs
existing at this web site is actually marvelous.

my homepage :: research paper on obesity

Anonymous said...

Good web site you have got here.. It's hard to find excellent writing like yours nowadays. I truly appreciate individuals like you! Take care!!

my homepage ... free essays online

Anonymous said...

Hello very cool blog!! Man .. Excellent .. Wonderful .
. I will bookmark your web site and take the feeds also?
I am happy to find numerous useful information right here within the post, we want work
out extra strategies in this regard, thank you for sharing.
. . . . .

Feel free to surf to my website :: research paper grading
rubric ()

raybanoutlet001 said...

new balance shoes
cheap ugg boots
snapbacks wholesale
ugg outlet
cheap basketball shoes
ugg outlet
michael kors handbags
coach outlet
mbt shoes outlet
nike air huarache

aaa kitty20101122 said...

reebok shoes
michael jordan shoes
true religion outlet
yeezy boost 350 v2
kobe basketball shoes
pandora charms
yeezy boost
hermes belts for men
chrome hearts

郑佳颖 said...

yeezy shoes
nike mercurial vapor
longchamp handbags
air jordans
air jordan
michael kors purses
jordan retro 13
adidas tubular
michael kors factory outlet
air jordan shoes

Shweta jain said...

Wonderful post dear……..keep posting!!
Designer T-shirts