The U.S. Federal Reserve has raised short-term interest rates for the first time in nearly a decade, ending its policy of near-zero borrowing costs for banks since the financial crisis.
For Cayman’s consumers, the rate increase will result in higher borrowing costs for certain loans and mortgages that are tied to the Fed’s benchmark rate.
“As is the case with other local financial institutions, Butterfield’s prime rates, on which lending product pricing is based, are tied to the benchmark rate established by the U.S. Federal Reserve,” said Mike McWatt, deputy managing director at Butterfield.
“Following the Fed’s announcement yesterday of a 25 basis points [0.25 percent] increase in the benchmark rate, Butterfield has increased rates on lending products in accordance with the terms and conditions of our agreements with customers.”
The Federal Reserve anticipates that the quarter-point increase in the federal funds rate to 0.25-0.5 percent is going to be the start of a “gradual” increase over the next two years.
The committee’s projection for the federal funds rate for next year remains at 1.375 percent and the 2017 estimate is slightly lower at 2.375 percent, down from 2.625 percent.
“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and repression since the Great Depression,” said Fed Chair Janet Yellen. “It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardship of millions of Americans.”
The Federal Reserve is confident that the U.S. economy will continue to strengthen but room for improvement in the labor market remains and inflation is running below the Fed’s inflation target of 2 percent, she said.
Still, even after the modest rate increase, the Fed’s monetary policy stance remains “accommodative,” Ms. Yellen added.
In a statement, the Federal Open Markets Committee, which sets interest rates, said it expects that “with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.”
Policymakers expect the U.S. economy to expand by 2.4 percent next year and 2.2 percent in 2017, and the U.S. unemployment rate to fall below 5 percent, where it currently stands.
The financial markets largely priced in the widely expected rate rise as the S&P 500 gained 1.5 percent, and the U.S. dollar was down slightly against the euro after the decision.
The U.S. rate move contrasts with the rest of the world, particularly Europe and Japan, where monetary policy continues to ease to support a comparatively slow economic recovery.
Should the divergence in monetary policy continue in the medium term, it will mean that the U.S. dollar, and the pegged Cayman dollar, will appreciate against the euro and other currencies.