High prices and bank rate hikes hit the poor hardest

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On July 27, 2022, the Board of Governors of the United States Federal Reserve System voted unanimously to approve a 3/4 percentage point increase in the primary credit rate to 2.5%, effective in today, July 28, 2022. This follows the 1/4 percentage point increase in the primary credit rate in March 2022, the 1/2 percentage point increase in the primary credit 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 the latest US Federal Reserve rate hikes, then the poorest people in the country could be the most hard hit.

Why the poor will suffer

Simply put, low-income people will be hit the hardest because they have low cash flow. Right now they are struggling to meet their monthly expenses and try to stay alive by getting support from charities or borrowing from friends or quick pay agencies (where they put their personal effects as collateral). These monthly expenses, in the form of volatile gas, utility and food prices are not improving either. In fact, they continue to rise in Cayman, up to 11% in March 2022, according to the Consumer Price Index released by the Office of Economics and Statistics.

The current struggles of the poor could be exacerbated by any further borrowing rate increases by Caymanian banks now or in September, November or December, when the US Federal Reserve may raise rates again. If such increases occur, then the poor will indeed be pushed over the edge financially.

Exceeding financial limits means low-income people may not be able to keep up with loan repayments, leading to defaults and foreclosures. This has a domino effect as foreclosures can lead to homelessness or greater reliance on the needs assessment unit or charities for financial assistance.

Why high-income people may suffer less

Big companies and high-income people are less likely to seek help from the NAU or charities because they have the kind of cash flow that can keep them above water in the face of rising rates discount or inflation. Ultimately, they can continue to make loan repayments without fear of default. Due to their higher cash flow, Caymanian banks are also likely to consider lending to them even when the economy is facing a crisis…because there are fewer worries about their ability to repay.

efforts to help

Regarding the impact of rising borrowing rates on the poor, the regulator or government should investigate whether Caymanian banks are borrowing from US banks. If Caymanian banks are borrowing from US banks, this confirmation will help people understand the logic that Caymanian banks automatically raise local borrowing rates when the Federal Reserve raises US rates.

If Caymanian banks do not borrow from US banks, Caymanian government authorities should discuss with Caymanian banks the rationale for increasing local borrowing rates whenever US borrowing rates increase.

While awaiting the answer to this question, it should be noted that the Deputy Prime Minister and Minister of Finance and Economic Development, Chris Saunders, has announced that more affordable borrowing will be made available through the Business Development Bank of the Cayman Islands (CIDB), while the CIDB has 15 Canadian dollars. million to lend to Caymanian mortgage seekers and offers eligible borrowers interest rates as low as 3.75% for two years. It is unclear whether the poor will be ‘eligible borrowers’, however, the Deputy Prime Minister’s decision goes in the right direction as it addresses the impact of rising borrowing rates.

Outside the banking system, it should be noted that the Economics and Statistics Office (ESO) collects quarterly the prices of petrol, fruit, vegetables, fish and meat, most volatile prices represented in the rising Cayman inflation index. In this regard, the Minister of Agriculture, Jay Ebanks, has been working during his official visits abroad to create new agreements with Jamaica and Honduras to get more affordable food products on the shelves. of the Caymans, which will hopefully help reduce the cost of living in the area of ​​food.

In other areas of the cost of living, the government has put in place a number of initiatives, including the electricity credit initiative to help some people during the summer months when the costs of electricity may be higher.

When it comes to gas prices, unless the people ask their MPs to change the law to remove the requirement that the regulator must ensure “that people in the fuel business get fair and reasonable returns or unless a formula for calculating “reasonable returns” is included in the law, there is little the regulator can do as its hands are tied by law.

Next steps

For circumstances to improve for the poor in Cayman, people need to reinforce with MPs that people come before profits. This means that if banks cannot present a rationale for raising borrowing rates every time US borrowing rates rise, then this practice must stop. If laws/laws continue to tilt in favor of monopolies or other dominant players rather than cementing competition, full transparency and consumer protection, those laws/laws need to be changed. If duty-free items are sold at astronomical and lower prices, the duty-free prices are not passed on to consumers, then such practices need to be examined.

Unfortunately, if people only talk about the issues in the private corners of Cayman and if they don’t take the next step and protest or pressure policy makers, tough times are ahead for the Caymanians, especially the poor and low-income people.

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