Cayman residents should brace for a further increase in interest rates on borrowing this week following the Federal Reserve’s Federal Open Market Committee meeting, scheduled for January 31 to February 1, 2023.
Speaking about what decision the Federal Open Market Committee may make, Bill Conerly, a senior contributor to Forbes.com, said that “Within the Fed’s meeting, there will be voices claiming substantial victory over inflation and no need to put the economy through more pain.”
There will be other voices pointing to historical experience and econometric models showing their work is not yet done. Both sides will have data to support their positions. This is a time of unusual uncertainty, and the Fed has no easy choice in front of it.
These comments and others illustrate that this week’s interest rate decision could be unpredictable. That is, it may be an increase of 25 basis points, as talked about, or it may be more.
This is important because, based on previous decisions of the Federal Open Market Committee, Cayman banks usually follow suit and increase their interest rates on borrowing.
If this happens, it may be more challenging for people to borrow. Any rate increase, whatever the amount, will also result in a more significant portion of loan payments being applied to interest rather than principal.
Regarding the automatic increase of loan interest rates by Cayman Banks immediately following increases by the United States Federal Open Market Committee, residents in the Cayman Islands may wish to consider discussing with their members of Parliament whether a time lag could be implemented whereby Cayman bank interest rates do not rise immediately following a US interest rate decision or whether legislation could be passed in the first quarter of 2023 to discourage local banks from doing this (especially if it is the case that there is no proven link between US interest rate increases and local interest rates). Alternatively, if the regulatory power does not already exist, perhaps the Cayman Islands Monetary Authority could be provided with the relevant authority to regulate loan interest rates.