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Alternative Investment

Low Interest Rate, What it Means


“This should encourage households and businesses to look for alternative investments that could give them higher returns, including products in the capital markets (stocks or bonds) or other asset classes such as real estate or pursue commercial opportunities.’


The Reserve Bank of Fiji Governor Ariff Ali. File Photo

Low interest rates bode well for the economic recovery path that Fiji is on, says the Reserve Bank of Fiji Governor Ariff Ali.

Mr Ali was responding to queries raised by Sunbiz on the decrease in term deposit rates in all commercial banks to as low as 0.50%.

Mr Ali said the main source of commercial bank funding to finance the needs of borrowers was through term deposits.

Therefore, the lending rate charged by banks was largely influenced by the cost of funds, which was the interest rate the bank pays on deposits.

“There is an inverse relationship between bank liquidity and term deposit rates. When liquidity is running low, banks will offer higher term-deposit rates to attract more funds from the general public to on-lend, and vice versa.”

He said currently, banks are flushed with liquidity; hence they offer lower term rates as they don’t need additional funding from the public.

 

As of August 26, 2022, Mr Ali said commercial banks’ demand deposits (excess liquidity) held at the Reserve Bank totaled $2,590.8 million.

High liquidity in the banking system over the past year was attributed to the build-up in our foreign reserves holdings which was driven primarily by external government loan draw-downs, strong remittance inflows and an upswing in tourism receipts since the borders reopened late last year.

Furthermore, he added, commercial banks’ utilisation of the RBF’s special lending facilities, namely the Disaster Rehabilitation and Containment Facility and Import Substitution and Export Finance Facility, contributed to high liquidity levels in the banking system.

“In a nutshell, high liquidity in the banking system means that banks have enough funds to finance borrowers, thereby removing the need to pay higher interest rates on term-deposit from the public.”

Since the banks’ cost of funds is low, overall lending rates will also be low, thereby supporting credit growth, investment and overall economic recovery.

“Now, all commercial banks have reduced their lending rate as deposit rates have fallen. In fact, the weighted average lending rate is at an all-time low.”

 

Mr Ali was also questioned on why the interest rates was dropping if the economy was doing well. He said generally, when an economy does well, pent-up aggregate demand can put upward pressure on interest rates if it is not matched by a higher level of money supply or liquidity.

“Currently, banks have enough funds (liquidity) with them for lending purposes. Consequently, they do not need to offer higher rates to get more funds to lend.

“While GDP growth for this year is projected at 12.4 per cent, it is important to note that Fiji is in a recovery mode and will only reach the pre-pandemic output level in 2024.”

He added that the Reserve Bank, in its bid to support economic recovery, was influencing rates downwards by ensuring that liquidity remained high and banks had enough funds to lend to support the economic recovery.

 

What Does This Mean To The Public?

Individuals targeting term deposits as a source of investment would get lower returns on the deposits they keep with banks.

Mr Ali said this should encourage households and businesses to look for alternative investments that could give them higher returns, including products in the capital markets (stocks or bonds) or other asset classes such as real estate or pursue commercial opportunities.

Alternatively, the general public would gain as they could borrow at lower rates to finance their investment or consumption appetite.

“This supports economic activity, gets people employed and contributes to growth. “If the economy grows, that benefits the general public and the nation.

For example, the total wages and salary in the formal sector were $282.0 million in June 2022, much higher than the $222.0 million a year earlier, a reflection that the economy is growing and more people are employed.”

 

How Long Will This Be?

Central banks influence interest rates in line with their monetary policy stance.

Mr Ali said it was difficult to provide specific timelines because of the wide range of challenges and uncertainties we confront on the global and domestic fronts.

However, it’s likely that there will be no major change to the current accommodative monetary policy stance in the near term.

“It is important to note that as the economy recovers toward its pre-pandemic output, liquidity levels are expected to fall to normal levels.”

“This will incentivise banks to raise term-deposit rates to secure more funds for on-lending. High interest rates will benefit savers on the one hand but make borrowing costly on the other hand, which could be a drag on economic activity.”

Meanwhile, the RBF Board reviews the appropriate monetary policy stance, including its overnight policy rate, the direction of which influences other market interest rates every month.

 

Feedback: selita.bolanavanua@fijisun.com.fj

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