Savings rate floor hurt banks and the economy

What is it about?

The relevance of the minimum savings deposit rate in existence since 1985 in the Eastern Caribbean Currency Union is evaluated in the context of the current secular decline in growth (ongoing since 2008) . Evidence presented suggests that it has forced banks to reduce spreads below pre-recession levels and adopt liability profiles that are now more skewed towards more liquid forms of deposits, which is contrary to what should be expected (according to established theories) in recessionary period. Both developments put the health of the banking system at risk and ultimately create a drag on growth.

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Why is it important?

In the context of a monetary union based on a currency board arrangement and limited fiscal space due to high debt levels in member states, the floor is a significant policy instrument for macroeconomic management. Since the publication of this article in February 2015, the Eastern Caribbean Central Bank has decided to lower the floor rate by 100 basis points to 2% effective May 2015.