As you may have read, beginning today April 21st, the Central Bank of Barbados will no longer be stipulating a minimum rate of interest on savings deposits at commercial banks. We believe this change has some implications for how savers in Barbados may wish to think about their cash balances.
Why does this matter?
In recent years the specified minimum interest rate on regular savings accounts has been 2.5 percent. Now that the Central Bank will no longer be requiring commercial banks to offer a minimum rate of interest, each commercial bank can set their own interest rate for savings deposits. At least one commercial bank has already indicated that it will be changing the interest rate applied to savings deposits, but customers will have to wait until May to see exactly what that change might be.
The immediate effect of any reduced interest rates on savings deposits is simple – you will earn less on your savings. This can put savers at a disadvantage as it relates to battling inflation. Inflation occurs when the level of the prices for goods and services rises, and consequently purchasing power falls. So, in a situation where you earn less on your savings, your power to keep up with rising prices is diminished.
A Wider Context
In many markets around the globe, interest rates on savings accounts already vary from bank to bank and are at historically low levels. Some are even negative. Given Barbados’ weakened economic situation in recent years, we may have been earning more than we should have been getting if saving deposit rates had been dictated by market conditions rather than by the Central Bank.
On the positive side, now that the rates of interest on savings deposits will be more indicative of financial market forces, they may favourably impact interest rates for borrowing. This in turn could facilitate more economic activities such as business development, construction and consumer spending which has implications for employment growth.
What does this mean for you and your money?
While we can’t predict what each of the commercial banks will do with their deposit interest rates in this new environment, or when they might do it, we can say that lower deposit rates are likely around the corner. Now is a good time to make sure your savings are structured as efficiently as possible. We think there are two points in particular worth considering:
• Invest the rest – Lower interest rates on savings accounts mean that we all need to pay even more careful attention to how much of our long-term savings we may have “lumped in” with short-term cash balances. Each dollar we earn needs to be given a job. Everyone needs a good balance of cash in the bank to pay bills, meet normal expenses and keep a substantial cushion for the unpredictable. Beyond this amount, excess funds kept in a low-interest account may be far better redeployed into investments that can earn higher returns and hopefully outrun inflation over the medium or long-term. Mutual funds are a great way to invest while getting instant diversification and maintaining liquidity. Real estate can also be a viable longer term option. Whichever investments we choose, the most important part is to determine what cash reserves we actually need, and to invest the rest.
• Ask questions – Just as we would when buying a car, spending time looking around and researching the available options is important with financial products as well. It is useful to learn what the different financial institutions have to offer, in what way and to what extent they are regulated, what fees they charge, what risks you will be accepting, and how you can gain access to your money if you need it back. Professional advisors can help. And naturally, beware of offers that sound too good to be true, because history has shown that they usually are.
At Fortress investing is all we do, and we’d be very happy to answer any questions you may have. Please feel free to contact us at 431-2198 or email@example.com.