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Interest rates took centre stage on the European banking circuit again this week with Malta's two major banks giving the latest ECB interest rate cut a miss. It was the first time in this spate of cuts that HSBC Bank Malta and Bank of Valletta, both...
Interest rates took centre stage on the European banking circuit again this week with Malta's two major banks giving the latest ECB interest rate cut a miss. It was the first time in this spate of cuts that HSBC Bank Malta and Bank of Valletta, both self-confessed conservatives, had not passed on some or all of the rate cuts announced by the European Central Bank.
Locally, only the Sliema-based Volksbank has passed on in full the recent cuts in interest rates (See story on page 5).
Most banks across the eurozone, however, appear to have handed over the most recent ECB cuts as the central bank on Monday reported significant falls in interest rates on mortgages and lending.
A week ago, ECB president Jean Claude Trichet claimed that the central bank's cuts were being cascaded through the banking system, saying the "transmission mechanism of monetary policy is not significantly hampered".
The ECB has hacked borrowing costs by 275 basis points from 4.25 per cent to 1.5 per cent since October, the lowest since the birth of the euro in 1999. Last Thursday, the ECB announced a further cut of 50 basis points in its reference rate from two per cent to 1.5 per cent.
On the same day, BoV decided to pass up on the latest cut: "On this occasion, and for the time being, BoV is not proposing to make further reductions to either deposit or loan/advances rates." It said its rates were "already very competitive by European standards" with mortgages available from 3.15 per cent.
On Monday, HSBC Malta said it would leave its base rate unchanged given the "prevailing market environment" and considering "the needs of borrowing and saving customers".
"It is important for HSBC Bank Malta to continue to grow its deposit rate to support ongoing lending," the bank said. The bank's base rate for lending is set at 2.5 per cent, for mortgages at 2.25 per cent.
The decisions were largely given a nod, although an HSBC Malta spokesman yesterday reiterated that the bank had not increased its base rate, which remained at 2.5 per cent, after some misunderstanding over a 'credit premium' surfaced during the week.
"The cost of borrowing is determined by the banks' base rate and an interest margin which reflects the banks' assessment of the market and the individual borrower's risk. There is no such thing as a standard 'credit premium'," the spokesman pointed out.
Shareholders and savers will have been pleased with the local banks showing their backbone, but what are the implications now? If countries' major banks decide not to reflect the ECB's cuts, then what is the point?
Asked if this could be the end of this cycle of interest rate cuts, economist Edward Scicluna explained: "Interest rates are lowered in order to reduce the cost of household and company borrowing, which under normal circumstances would stimulate spending.
"Obviously, for this to succeed, banks' own rates have to move in tandem with the official rates set by the Central Bank. Rates start to approach zero when the economic situation is very bad, as at present. But this raises the risk on outstanding and new loans. The bank's response is to raise the rate rather than lower it. Some governments try suasion methods or provide loan guarantees to persuade banks to continue to lower their rates. Beyond this state is the sheer printing of money called quantitative easing, a stage we seem to be getting closer to by the day."
Unlike the US Federal Reserve and the Bank of England, the ECB has until now resisted resorting to quantitative easing, a measure which still aims to bring down interest rates faced by companies and households.
Quantitative easing sees central banks create new money for use in an economy by electronically increasing the credit in their own accounts to buy government bonds, corporate bonds or equities. With the central bank weighing in, the price of the assets it buys should rise and the yield or the interest rate on that asset will fall.
Analysts warn quantitative easing, however, comes with dangerous pitfalls which could lead to severe inflation and central bankers have great difficulty determining in what measure it should be prescribed to ailing economies.
Locally, only the Sliema-based Volksbank has passed on in full the recent cuts in interest rates (See story on page 5).
Most banks across the eurozone, however, appear to have handed over the most recent ECB cuts as the central bank on Monday reported significant falls in interest rates on mortgages and lending.
A week ago, ECB president Jean Claude Trichet claimed that the central bank's cuts were being cascaded through the banking system, saying the "transmission mechanism of monetary policy is not significantly hampered".
The ECB has hacked borrowing costs by 275 basis points from 4.25 per cent to 1.5 per cent since October, the lowest since the birth of the euro in 1999. Last Thursday, the ECB announced a further cut of 50 basis points in its reference rate from two per cent to 1.5 per cent.
On the same day, BoV decided to pass up on the latest cut: "On this occasion, and for the time being, BoV is not proposing to make further reductions to either deposit or loan/advances rates." It said its rates were "already very competitive by European standards" with mortgages available from 3.15 per cent.
On Monday, HSBC Malta said it would leave its base rate unchanged given the "prevailing market environment" and considering "the needs of borrowing and saving customers".
"It is important for HSBC Bank Malta to continue to grow its deposit rate to support ongoing lending," the bank said. The bank's base rate for lending is set at 2.5 per cent, for mortgages at 2.25 per cent.
The decisions were largely given a nod, although an HSBC Malta spokesman yesterday reiterated that the bank had not increased its base rate, which remained at 2.5 per cent, after some misunderstanding over a 'credit premium' surfaced during the week.
"The cost of borrowing is determined by the banks' base rate and an interest margin which reflects the banks' assessment of the market and the individual borrower's risk. There is no such thing as a standard 'credit premium'," the spokesman pointed out.
Shareholders and savers will have been pleased with the local banks showing their backbone, but what are the implications now? If countries' major banks decide not to reflect the ECB's cuts, then what is the point?
Asked if this could be the end of this cycle of interest rate cuts, economist Edward Scicluna explained: "Interest rates are lowered in order to reduce the cost of household and company borrowing, which under normal circumstances would stimulate spending.
"Obviously, for this to succeed, banks' own rates have to move in tandem with the official rates set by the Central Bank. Rates start to approach zero when the economic situation is very bad, as at present. But this raises the risk on outstanding and new loans. The bank's response is to raise the rate rather than lower it. Some governments try suasion methods or provide loan guarantees to persuade banks to continue to lower their rates. Beyond this state is the sheer printing of money called quantitative easing, a stage we seem to be getting closer to by the day."
Unlike the US Federal Reserve and the Bank of England, the ECB has until now resisted resorting to quantitative easing, a measure which still aims to bring down interest rates faced by companies and households.
Quantitative easing sees central banks create new money for use in an economy by electronically increasing the credit in their own accounts to buy government bonds, corporate bonds or equities. With the central bank weighing in, the price of the assets it buys should rise and the yield or the interest rate on that asset will fall.
Analysts warn quantitative easing, however, comes with dangerous pitfalls which could lead to severe inflation and central bankers have great difficulty determining in what measure it should be prescribed to ailing economies.