Reducing prime rate

The lower cost of borrowing, represented by the recent reduction by banks in Trinidad and Tobago of the TT dollar prime lending rate from 9.5 percent to 8.75 percent, should stimulate the economy in the medium and long-term through making loans more attractive to manufacturers and farmers. Consumer spending should also be enhanced, and with manufacturers and farmers benefiting from increased consumer interest as well as new investments should see the creation of additional jobs and a further added turn-a-round of money within the economy.
 
The strategy adopted by the Central Bank, which has resulted in the further driving down of interest rates, should act as a spur to manufacturers, who have been hit albeit, hopefully, in the short-term by hurricane Ivan’s hobbling of their CARICOM export market, to invest in new plant and machinery in a bid to assume some of the business of old regional rivals. However, with the prime lending rate sharply reduced from its May, 2001 level of 15 percent, at a time when the Barbados and Organisation of Eastern Caribbean prime lending rates hovered around ten percent has placed it in a far more competitive position than that of three years ago.  Meanwhile, although the country’s prime lending rate is still somewhat higher than what obtains in the United States, yet on the virtual eve of the establishment of the Free Trade Area of the Americas, the 8.75 percent is much closer to parity with the United States prime rate than it was in 2001.
 
This should enable Trinidad and Tobago manufacturers and farmers, providing not only that they optimise benefits of the 8.75 percent prime, but that Central Bank strategies stimulate a further drop in the prime interest rate to put it even closer to competitive parity with that of the US, should see the landed costs of exports of our goods and services to the US in a far better position. A realistic assessment of the reason for today’s relatively low TT dollar prime lending rate by banks, however, would show that it was dictated not by altruism on the part of the country’s commercial banks, but because of the relatively high level of liquidity within the system which the Central Bank noted and acted upon. The raison d’etre of banks is the earning of money for their depositors and for their shareholders through the provision and effective marketing of bankers’ services.  Too much liquidity blunts that.

Nonetheless, with all of the investment and trade pluses that a low interest rate can bring, a downside to too low interest rates is inflation. The continued fall in the prime lending rate from the May, 2001 level of 15 percent without any evidence of an inflation backlash does not suggest that this is likely to happen in the short-term, particularly as the driving down of interest rates has been accompanied by a marked increase in investments in companies listed on the Trinidad and Tobago Stock Exchange.