Interest rates go down

Many of Cayman’s banks have lowered their lending rates in response to the US Federal Reserve’s emergency reduction of its prime rate by three-fourths of a percentage point on Tuesday.

Scotiabank announced in a newspaper advertisement yesterday that it was decreasing its CI dollar prime rate from 7.25 per cent per annum to 6.5 per cent p.a. effective 23 January. Butterfield will do the same 24 January.

Scotiabank & Trust Managing Director Freddy Sulliman said in the past, all of Cayman’s clearing banks advertised as a group.

‘This is the first time we are advertising individually,’ he said.

All of Cayman’s other banks are expected to follow suit, if they haven’t already.

‘I am sure all of the clearing banks will be changing with almost immediate effect, as the Cayman Islands Prime Rate moves in tandem with the US,’ Mr. Sulliman said.

Fidelity Bank (Cayman) President and CEO Brett Hill said the way banks go about announcing interest rate decreases has changed.

‘The way it used to happen was that after there was a cut in the US prime, all of the clearing banks would go to the Financial Secretary and ask if we could cut CI prime, and he would say yes,’ he said. ‘Now, rather than asking the FS, each of the banks will announce the rate cut individually.’

Mr. Hill said the change was made partially to speed up the process.

‘The banks here were criticised before for holding rates up,’ he said. ‘In actuality, they were never held up more than until Monday the following week.’

Cayman National Bank President Ormond Williams said his bank cut its prime rate effective Tuesday, the same day the US Federal Reserve acted.

‘Going forward, we expect our prime rate reductions or increases to be expedited in a similar manner to [Tuesday’s] immediate action, barring any operational issues which might prevent us from doing so.’

The US Federal Reserve made the unusual emergency rate cut – which was its largest single rate cut since 1984 – after the US stock market dropped over 450 points in early trading on the fear of a recession in America. The stock market rallied after the interest rate announcement to gain most of the loss back.

Despite that rally, many economists still predict the United States is heading for a recession

It was widely expected the Fed would cut rates anyway in its scheduled meeting next week. Many analysts are now an expecting an additional easing of rates in next week’s Fed meeting, possibly up to a half a percentage point more, as the US tries to stave off a recession in an election year.

Mr. Sulliman said he was hopeful this week’s interest rate decrease would have a positive effect on the local economy.

‘Obviously, we are still prone to the US economy and it remains to be seen what impact the Fed action will have there and when,’ he said. ‘However, the rate cut in Cayman will improve the cash flow of businesses and individuals.

‘Individuals will have some more purchasing power, which should also benefit the business sector, or alternatively they will increase their savings and investments.’

Mr. Hill also believes the rate cut will generally help here in Cayman.

‘It’s good for the average person who has a loan,’ he said. ‘But I think the situation with the US economy could have a wider effect on the tourist trade here.’

The vast majority of loans in the Cayman Islands are made at variable rates, meaning they fluctuate up and down depending on the prime rate.

Mr. Williams offered some reasons the rate decrease could help in Cayman.

‘With lower interest charges on a monthly basis as a result of a decrease in interest rates, loan payments should have a larger element of reduction to the principle,’ he said. ‘One other potential benefit of a decreasing rate environment is that it provides an opportunity for cheaper borrowing, especially in the earlier stages of a new business, which should augur well for cash flow.

‘A protracted period of interest rate reductions could be a catalyst to stimulate an economy,’ he added. ‘However, it is necessary for many other economic conditions to collaborate with rate reductions for a significant desirable outcome to be achieved.’

Mr. Williams warned that interest rate movements were cyclical and he encouraged clients not to over-extend themselves when rates are down, because it could cause undue financial pressure when the rates move upwards again.