BoB policy compels change of strategy

In its Mid-Term Review of the Monetary Policy Statement released last Friday, BoB hints that the prevailing low interest rate regime will continue to support an economy whose recovery is buffeted by reduced government spending, low consumer demand, constrained incomes and depressed output.

With BoB lowering interest rates five times last year and inflation rising between December 2009 and July 2010, real interest rates - or the actual yield due to commercial banks from their lending activities - have been moving towards negative territory. While the trend is a godsend to borrowers, it bodes ill for the country's nine commercial banks whose profitability has traditionally been anchored on interest income, the banks leveraging off the spread between deposit and lending rates. The Mid-Term Review indicates that real interest rates fell in the first half of 2010, with the real prime lending rate "easing from 5.39 percent in December 2009 to 3.53 in the same period".