The last move by the Monetary Policy Committee (MPC) has further dropped the policy rate from 20% to 18%. The 200 basis point drop is definitely a welcome news. This is what the business community and borrowers have been looking for. Definitely not very welcoming news for banks and some investors. From whatever side of the divide the reduction means something.
To the one who is seeking to raise some funding through credit, it is a welcome news. It is expected that banks would similarly adjust their lending rates. This is true but not so fast. Banks would mostly not immediately adjust their lending rates to curb a bit of repricing risk. However the general underlying factor for the cost of funds is now relatively lower. There are a few other factors that would mitigate against the immediate or a corresponding reduction of your bank’s cost of borrowing which is, the continuing rise of cost of doing business and the dollarization of the economy. Borrowers (individuals or businesses) should also be aware they may incur other costs like loan monitoring fee, processing fee and cash locked up as collateral, which could still make cost of borrowing quite significant. It is expected that loan monitoring fee could shoot up because there is more pressure on banks now to maintain asset quality and monitoring is one way to achieve that. So lending rates may be reduced but beware of the other charges that may make general cost of borrowing high. A borrower can negotiate on interest rate and other loan charges.
The individual investor may be in want of high yielding interest bearing instrument. The hitherto high yielding treasury bill, which used to give returns as high as 26% per annum for 182-day bill is now yielding returns in the early teens and at this rate would even drop further. Not good for the investor who needs a less risky investment and is very much used to the Treasury bill. The banks would also likewise revise their fixed deposit and savings rates downwards.
This adjustment would be much faster than the lending rate. The higher savings and fixed deposit rates may be with banks who would want to remain competitive or probably are desperate for cash to keep them afloat.
Those who have invested in mutual funds will still find their returns lower if their fund is more tilted towards the money market which includes fixed deposits. Before you invest in a mutual fund take the trouble to find out what the underlying asset is/are and in what proportions are they. If they are skewed towards money market you can be sure yields would be reduced. With the fixed income investment slowed down, it is likely the equity sector would begin to pick up as activity would shift there. Therefore mutual funds skewed towards with equity may give good yields if fund managers are picking good stocks.
One institutional investing which affects a lot of people is pensions investment. There has already been a shift from the interest bearing fixed income since their decline with the interest rate. With the decline of the policy rate from 20% to 18%, the current bonds would see their value appreciate and so can get some gains especially if traded on the secondary market. It is time for institutional investors to begin looking more to the stock exchange, both the primary stock market and the alternative market (GAX). With the pension funds now floating around, it is expected that investment companies would begin to launch more mutual funds. Private equity firms are also likely to show up soon. A portfolio with the structure of a typical pension fund may not lose much as they make use of professionals to invest and so they can find other alternatives to invest.