Banks’ prime lending rate slashed

Central Bank Governor Ewart Williams yesterday announced a reduction in the prime lending rate of commercial banks from the current range of 11-11.5 percent to about 9.5 percent.

Williams said the bank has also decided to lower the reserve requirements of the local banks from 18-9 percent on a phased basis over a period of 18 months. The plan will result in the equalisation of the reserve requirements between banks and non-banks by end of 2004, or early 2005. At a press briefing yesterday at the bank’s conference offices, Williams outlined the reduction as follows: four percentage points from October 22; three percentage points by end of June 2004 and two percentage points by end of 2004 or early 2005. The result of the immediate reduction in the reserve requirement, he said, will be to return an estimated $640 million, now sterilised in the Central Bank, to the commercial banks. To avoid any fallout of this injection of funds, a special issue of Government securities will be put out, he said. 

The Central Bank was of the view that a major reduction in the level of interest and in the spread between commercial banks deposit and lending  rate is needed “to support a sustained growth in the real GP over the medium term.” Commercial banks agree with the Central Bank that the reduction in the reserve requirement should result in a lowering of both the prime lending rate and the intermediation margin, defined as the spread between the weighted average lending and borrowing rates. With the decline in the prime lending rate, other lending rates could be expected to decline. Williams said the Central Bank has also decided to eliminate the special five percent secondary reserve requirement normally held in Treasury Bills which was first introduced in 1967, but over time lost its significance. He said the Central Bank will monitor the commercial banks’ interest rate spreads to ensure that the desired reduction indeed takes place. 

Williams explained that over  the last decade, developing countries have been moving away from reliance on reserve requirements as an instrument of monetary policy, adding that central banks are placing more emphasis instead on open market operations. Commercial banks, he said, have collectively agreed to waive service charges on third party withdrawals, encashment of cheques at different branches of the same bank, photocopying services relating to bank transactions, closing accounts within three months, withdrawal without passbooks and notification/activation of dormant accounts.