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Fed rate hike will hurt borrowers, help savers

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Veteran real estate agent Larry Sticca said the federal funds rate increase can make a significant difference, especially for people borrowing short term (Photograph by Jessie Moniz Hardy)

Veteran realtor Larry Sticca says that the 0.75 per cent US federal funds rate rise announced on Wednesday may dampen the real estate market in Bermuda, but probably will not bring it to a complete standstill.

“It will probably hit customers on the borderline of being able to afford to buy a house or condo,” Mr Sticca, of Cranfields Property Bermuda Ltd, said.

Meanwhile, chartered financial analyst Robin Masters said that investors may see some improvement to the interest rates earned by their money on deposit.

But Chamber of Commerce president Nathan Kowalski, himself a CFA and a chartered investment manager, said savings and investments may actually suffer.

The US Federal Reserve, the country’s central bank, boosted its benchmark overnight interest rate by 75 basis points in the face of runaway inflation in one of the world’s largest economies.

It was the Fed’s second such increase in six weeks, after June numbers pegged the US annual rate of inflation at 9 per cent.

At the consumer level, the rise in the federal funds rate will affect car loan, credit card and mortgage interest rates in the US.

Observers in Bermuda are now waiting to see how much of the Fed rate increases the banks will pass on to their customers.

Mr Sticca said rate rises here could cause some people to hold off on buying property, or could make them look for a smaller, less expensive property.

“Three quarters of a per cent can make a significant difference, especially if you are borrowing short term — say you want to go 20 years, instead of 30.

“In a way, it takes the demand down, which is good. The seller also has to take their expectations down. You cannot have high price and low demand.”

Bermuda Chamber of Commerce president Nathan Kowalski said the interest-rate rise was expected (Photograph supplied)

Mr Kowalski pointed out that this is the second time in a row the rate has been raised by 0.75 per cent after a Federal Open Market Committee meeting.

He said: “Given that growth is faltering, the Fed did acknowledge some concerns by noting that ‘spending and production have softened’. The Fed has been clear that inflation is a major concern and mentioned that ongoing rate increases would likely be appropriate.”

He said Bermuda interest rates are tied to US rates, therefore he would expect local mortgage and lending rates to move higher.

“Local banks will pass on the increase in their cost of funding to borrowers,” he said. “Higher financing costs could have a dampening effect on investment and spending locally.

“The good news is that the slowing US economy has caused longer-term rates to decline over the past two months, which will bring some relief to fixed-rate mortgages, but these rates are also higher than they were a year ago.”

Bermuda may see some uplift in rates for deposits and savings accounts, but it is still unclear how much of the rate increases local banks will pass along to customers.

“Another positive is that interest-rate increases will find their way into money market rates which will help boost returns for many companies, including insurance companies, that hold these funds as collateral,” Mr Kowalski said.

“The most important impact of this action is that the Fed is attempting to reduce the trajectory of inflation since most residents are aware that their wages are not keeping up with higher prices like those seen in food and gasoline costs.”

Ms Masters is a facilitator for a financial literacy course run by the CFA Society of Bermuda and the Bermuda College PACE Programme.

She said that people with variable rate loans — frequently tied to interest rates — may want to adjust the plan they have for managing their debt.

“You may need to cut back in other areas in order to balance things out,” she said. “You may want to go back to your lender and discuss the situation and see if you can renegotiate your payment plan.

“It may be appropriate to temporarily reduce the amount you've been putting in savings in order to pay down some of that loan as a way to partially offset the effect of an increased interest rate.”

But she agreed that the good news is that savings rates should begin to rise.

“We may start to again see meaningful amounts of interest received in our savings accounts,” she said.

Robin Masters, chartered financial analyst

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Published August 01, 2022 at 7:48 am (Updated August 01, 2022 at 7:48 am)

Fed rate hike will hurt borrowers, help savers

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