Is It Time to Revisit the Savings Rate Floor in the ECCU?

Allister Mounsey and D. Tracy Polius

Economic Affairs, 2015, vol. 35, issue 1, 75-92

Abstract: Member states of the Eastern Caribbean Currency Union (ECCU) experienced a secular decline in growth following the great recession circa 2008, resulting in increased unemployment and social dislocation. Given the ECCU's currency board arrangement and current fiscal challenges, policy options for resuscitating growth are limited to supply-side adjustments. This paper contends that the 3 per cent interest rate floor on savings deposits has contributed to higher lending rates and lower levels of capital formation. Ultimately it is a drag on growth and a threat to the banking sector's health as it has resulted in reduced risk compensation when default and other banking sector risks have risen. Revisiting the floor is advocated as an integral component of this structural adjustment policy response.

Date: 2015
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