By YOURI KEMP
Tribune Business Reporter
A well-known Bahamian economic commentator yesterday argued that the Central Bank should lower its Prime rate whenever the Federal Reserve raises US interest rates.
Dr Johnathan Rodgers, the eye doctor, told Tribune Business that The Bahamas needed to be more aggressive in using interest rates as a monetary policy tool.
“In my opinion The Bahamas should have lowered interest rates after the great financial crisis of 2008, as did every single country in the world. Had they had done that there would have been more people in their homes, far fewer foreclosures, more businesses open and more people employed,” he argued.
Some might argue that the Central Bank did exactly that in 2011, when Bahamian Prime was reduced to its current level of 4.25 percent. However, Dr Rodgers argued that the Central Bank should move beyond fears that it will trigger “increased borrowing” and greater import flows that would cause a “drain on foreign reserves” if it were to lower interest rates.
He added: “The problem with that is when you cut back on the borrowing, you’re cutting back on economic activity, so they’ve kept interest rates high deliberately for that purpose. But when you cut back on the borrowing, you’re cutting back on the economic activity and you’re cutting back on government’s income because most of the taxes come from the import duties.”
Reiterating that the Central Bank should consider cutting the discount rate now and not wait on a possible US hike, Dr Rodgers said: “The fact of the matter is this. What happens is when interest rates go up, especially American interest rates, money tends to follow interest rates.
“So what happens is when you went with quantitative easing - that is the government buying bonds from the banks, which puts money into the banking sector - when the price of bonds go up, interest rates come down.
“So that is why the Federal Reserve is buying bonds like crazy to keep interest rates down and to keep the economy going. When you sell the bond, on the other hand, that is called tapering and is the opposite of quantitative easing. The price of bonds goes down and interest rates go up.
Dr Rodgers continued: “As rates go up, money gets sucked out of the emerging markets into the US because money follows interest rates, and that’s problematic for emerging markets because all of the money went to them when the interest rates were low and caused an increase in economic growth, an increase in real estate transactions and an increase in stock markets.
“For the reversal of that economic growth, as interest rates go up, the money is leaving home as most debt is denominated in US dollars, but then you have a problem with a squeeze on the dollar. Today we’re trying to find dollars to pay off the debt, so what happens is the value of the dollar goes up and you get these credit squeezes. The value of the dollar goes up and those who borrowed in dollars, the principal of their debt increases.”
The Bahamas should not be afraid that pension funds, insurance companies and the National Insurance Board would suffer a loss of interest income on their fixed assets if interest rates are cut, Dr Rodgers advised. “Listen, if we don’t get this economy going there’s not going to be any people employed to pay their National Insurance or pay their pensions and insurance policies. We have to break the cycle somewhere,” he said.