On July 27, 2022, the Board of Governors of the United States Federal Reserve System voted unanimously to authorize a 3/4 percentage point increase in the primary interest rate to 2.5 percent effective today, July 28, 2022. This follows the 1/4 percentage point increase in the primary lending rate in March 2022, the 1/2 percentage point increase in the primary lending rate in May 2022, and the 3/4 percentage point increase in the primary lending rate in June 2022. If Cayman banks continue to mirror If the US Federal Reserve’s recent rate hikes reflect that, then the poorest people in the country could be hit the hardest.
Why poor people get hurt
Simply put, low earners will suffer the most because they have low cash flow. At the moment they are struggling to meet monthly expenses and are trying to stay alive by getting support from charities or borrowing money from friends or quick money agencies (where they deposit personal items as collateral). These monthly expenses in the form of volatile gas, utility and food prices aren’t getting any better either. They are even increasing in the Cayman Islands, by up to 11 percent in March 2022, according to the consumer price index published by the Economics & Statistics Office.
The current struggles of the poor could be exacerbated by any further hikes in lending rates by Cayman banks now or in September, November or December when the US Federal Reserve could hike rates again. When such increases occur, poor people are effectively pushed over the financial edge.
Exceeding the financial limit means lower-income people may not be able to keep up with loan payments, leading to defaults and foreclosures. This has a domino effect as foreclosures can lead to homelessness or greater dependence on the needs assessment unit or charities for financial assistance.
Why Higher Income Individuals May Do Less Harm
Large corporations and high-income individuals are less likely to turn to NAU or charities because they have the kind of cash flow that can keep them afloat in the face of rate hikes or inflation. Ultimately, they can continue to make loan payments without fear of default. Because of their higher cash flows, Cayman banks will also likely consider lending to them even if the economy faces a crisis…because there are fewer concerns about their ability to repay.
efforts to help
Regarding the impact of rising lending rates on poor people, regulators or the government should investigate whether Cayman banks borrow from US banks. If Cayman banks are borrowing from US banks, then this endorsement will help people understand the logic that when the Federal Reserve raises US interest rates, Cayman banks automatically raise local lending rates.
If Cayman banks do not borrow from US banks, Cayman government agencies should discuss with Cayman banks their rationale for raising local lending rates whenever US lending rates rise.
Pending the answer to this question, it should be noted that Deputy Prime Minister and Secretary of State for Finance and Economic Development Chris Saunders has announced that cheaper credit will be made available through the Cayman Islands Development Bank (CIDB), while the CIDB will be 15 CI$ has millions to lend to Caymanian mortgage seekers and offers qualifying borrowers interest rates as low as 3.75 percent for two years. Whether poor people will be “qualified borrowers” is unclear, but the deputy prime minister’s move is a step in the right direction as it addresses the impact of rising lending rates.
Outside the banking system, notes that the Economics & Statistics Office (ESO) collects quarterly prices for gasoline, fruit, vegetables, fish and meat, the more volatile price items featured in the Cayman Islands’ rising inflation index. In this regard, Secretary of Agriculture Jay Ebanks has made efforts during his official overseas visits to secure new agreements with Jamaica and Honduras to bring more affordable food to the Cayman Islands’ shelves, which will hopefully help reduce the cost of living in the food sector.
Regarding other areas of the cost of living, the government has introduced a number of initiatives, including the Electricity Credit Initiative, to help some people during the summer months when electricity costs may be higher.
Regarding gas prices, unless the people ask their MPs to amend the law to remove the requirement for the regulator to ensure “that people in the fuel sector receive fair and reasonable returns”, or unless , there is a formula for calculating “reasonable returns” In the law there isn’t much the regulator can do as their hands are tied by the law.
In order for things to improve for poor people in the Cayman Islands, people with MPs need to reinforce the idea that people come before profits. This means that if banks cannot provide a justification for raising lending rates every time US lending rates rise, then the practice must stop. If laws/laws continue to lean in favor of monopolies or other dominant actors instead of cementing competition, full transparency and consumer protection, these laws/laws need to be changed. When duty-free items are sold at astronomical prices and lower duty-free prices are not passed on to consumers, such practices need to be investigated.
Unfortunately, if the people of Cayman Islands only talk about the issues in private corners and don’t take the next step and protest or put pressure on policy makers, hard times will come for the people of Cayman Islands, especially the poor and low-income earners.