ECB in 'lower than expected' rate cut

A. Pace

Apr 3rd 2009, 00:53

Its essential that Maltese banks do not reduce the interest rates any further. They need customers to deposit monies in their banks. Banks won't survive otherwise. Malta has still a fairly strong economy compared to larger countries. We need to safeguard that. Investments will keep on flowing if the banks keep in mind that depositers are an important part of their livelihood.

Karl Abela

Apr 2nd 2009, 22:50

As Jeff Inguanez rightly commented, this situation is indeed a huge dilemma. Both sides of the coin are very important. The man on the street who cant see the full picture will regard banks from a negative perspective.

Whatever people say, the facts are that:

too low interest rates = no depositers
no depositers = no loans will be granted.
no loans will be granted = no investment
no investment = huge job losses

This is indeed a case of 'ahjar uff milli ahhh'

Mark Galea

Apr 2nd 2009, 21:04

@All
The money is by right of the depositor, so s/he can decide what to do with. As for defaulters, they are the root of most problems since banks ABUSED depositors' money to lend it to these defaulters.
So to all those economic professors writing down below, THE MONEY IS OF THE DEPOSITOR AND S/HE CAN DO ALL THE PRESSURE S/HE LIKES SINCE THE MONEY IS HIS/HERS. The ECB has the role of giving guidelines, not fixing rates. That is why the law gives leeway, since not all countries need the same rate of interest.

D. Cortis

Apr 2nd 2009, 19:44

@Jeff Inguanez (53 minutes ago)D Cortis: High rates of interest do not cause inflation; they are, rather, used to choke off inflation. Yes I am sorry as for my typo error. High interest rates are used to diminish inflation and low rates to increase it.

D. Cortis

Apr 2nd 2009, 19:42

PART 2: Now say banks keep the rates as they are. No one, in his/her right mind, would invest in equity so depositors increase. The only form of 'income' the bank has now is from lending money (shares wouldn't be worthwhile in the short term). Lending money to buy what exactly? Persons should be less prone to borrow money to buy cars, holidays, a sofa or 'useless' stuff. And fewer persons would borrow money to invest in equity (same reason as earlier). We all know house prices will not increase so any house purchases will be made due to a need only (ie much lower sales). So this will restrict borrowing to just 'needs'. So if a bank does not change interest rates, in the current scenario, it will get more depositors (why invest in risky assets that have a less expected return than simply putting cash in bank) and less lenders (why borrow money when assets are loosing value, unless its a need). By not changing the rate, banks would be sitting on a time-bomb.

B Sant

Apr 2nd 2009, 19:40

Well so the ECB, after long discussions and analysisdecides that for the eurozone area it would be better to reduce interest. BUT our 'charitable' organisations DECIDE, with the approval of the regulatory bodies and the goverment, to pocket in those gains and forget about the local economy.
Again this is the second time that the government has issued govt stocks on the eve of an interest rate reduction. One in August and one now. It seems that the govt is worried that if he issues bonds at a lower rate they might not be taken up. Lot of food for thought!

D. Cortis

Apr 2nd 2009, 19:36

PART 1: RE comments such as: "The rates of interest now are so low that it does not make sense any more to open fixed accounts in banks." That is exactly the point. As one can see, banks are offering 2% on a 1-year fixed term deposit. Now equity (stocks) are offering less than 2% expectancy (its a recession!). So should one invest in stocks which are risky and expected to offer less than 2% or go for the 'safe' option of putting the money in the bank. Obviously, under this comparison, the latter will be chosen not only by those who do not want to risk but by everyone who has any cash. Leaving a bank rate higher than an expected equity return would stop any investments in equity by almost all forms of investors - prudent or risk-takers. No economy can afford a lack of equity investments. That is why you cannot have a 'risk-free rate' of saving of 2% while equity is at a lower expected revenue. (more...)

Peter Murray

Apr 2nd 2009, 19:25

The sheer abject futility of the effectiveness or empowerment of the ECB is about to become evident as no one will,nor is compelled to,give this entity the time of day let alone acknowledge or recognise its decisions.We urgently need the legislation to be implemented as proposed by France and Germany at the G20 meeting to bring banks and financial institutions to heel and stop their Blunder and Plunder tactics that got us into this sorry mess we are currently embroiloed in.

David Micallef

Apr 2nd 2009, 19:13

If Gerald Fenech is the financial editor by that name and he really means his comment here, (meaning that banks lower interest rates for depositors from the already very low levels they are at now) then we should be really thankful editors like this do not run the country!

Mario Montebello

Apr 2nd 2009, 18:57

Banks here cannot keep lowering interest rates for depositors. The rates of interest now are so low that it does not make sense any more to open fixed accounts in banks. How can the banks lend, then? Comments like the ones by Gerald Fenech show lack of empathy for prudent people who save something for their future and then see their deposits earning miserly interest rates. For banks to be able to lend, there must be people who are attracted to make deposits. It's basic.

R.Gauci

Apr 2nd 2009, 18:56

The Goverment or better MFSA should seek that all interest rates cuts are passed to consumers! To people against these cuts I ask : Why did the ECB issued them so? If these cuts are not going to be passed to the consumers it will help not to decrease the inflation rate which is the aim for why they have been issued. In Malta there' s already a high rate of inflation when compared to other European Countries please don't keep making the mistakes and ignoring this problem as all European Goverment are trying to do there best to keep the inflation rate low as stated in this article. "The latest economic data have shown little sign of a let up in the recession, while annual inflation hit a record low of 0.6 percent in March and is expected to fall further". If you check Malta's latest inflation rate would realise that its much higher than that!!

Jeff Inguanez

Apr 2nd 2009, 18:34

Gerald Fenech: It was you who were insulting people as 'idiotic' for saying that banks should consider depositors' interests. I was pointing out to you that, rather than alleging that depositors are selfish, they are the people banks must court if banks are to have enough funds to lend to borrowers. As to the international financial and economic crisis, of course we are not immune. We are a very open economy and it is to our credit that unemployment in Malta has crept up to 4.2% at the last count when in other countries it is around 10% and in Spain, for example, it is a whopping 15%.

Gerald Fenech

Apr 2nd 2009, 18:16

Dear Jeff Inguanez. I will ignore your comments but you should check before you post allegations and not insult people in arbitrary fashion. Are you suggesting that we are immune to the economic disaster out there or do you have some sort of magic wand to solve financial problems? I am keen to hear more.

Jeff Inguanez

Apr 2nd 2009, 18:10

D Cortis: High rates of interest do not cause inflation; they are, rather, used to choke off inflation. Lower interest rates are used to stoke demand, as is happening now, when there is a worldwide recession. However, banks are on the horns of a dilemma: they need to have deposits in order to lend. They can only attract deposits if they offer attractive interest rates.

Jeff Inguanez

Apr 2nd 2009, 17:59

Gerald Fenech: With comments such as yours, no wonder our journalistic class is what it is. Banks need to attract deposits because if they don't have deposits, they cannot lend to their potential customers. It's not a question of depositors being selfish but of banks seeking deposits in order to be able to lend that money to borrowers.

Gerald Fenech

Apr 2nd 2009, 17:06

Banks have to pass on the rate cut sooner or later. I can't believe the idiotic comments passed by those who look at this problem with a selfish eye just interested in their deposits. As if people use banks to deposit large stacks of cash anymore! There are plenty of other products elsewhere anyway. If loans are going to remain high then ppl will start defaulting and bank's will be left with an even bigger problem - property which they cannot dispose of except at a loss. The latest employment figures are indicative (see previous story on timesofmalta) as they show a steep rise in unemployment. It's going to get worse before it gets better.

D. Cortis

Apr 2nd 2009, 16:54

The ECB was expected to cut the rate down to 1% so the title to this article is wrong.

With respect to the depositors vs lenders issue, a high rate of interest is usually prone to produce a high rate of inflation. Just like depositors can look elsewhere to invest their 'cash', lenders have a choice. Depositors can also create fixed term deposits which would enable them to 'freeze' the rate for a period of time.

Mark Galea

Apr 2nd 2009, 16:09

@Frans Micallef
Yes, my friend ...
Banks have people on loans by the neck, but they have to woo us depositors if they want us to invest.

Frans Micallef

Apr 2nd 2009, 15:56

John, you are right. Banks have to keep in mind depositors' interest too.. otherwise we'll invest elsewhere and banks would end up with a liquidity problem.

Joey Borg

Apr 2nd 2009, 15:51

Hope our banks will keep those with home loans in mind and pass the cut...

Mark Galea

Apr 2nd 2009, 15:25

Hope our banks will keep savers in mind and not pass on the cut (for their own good) ... else they will by forcing us to invest our money elsewhere (as some have already done).