Bermuda borrowers have not reaped the benefits of falling interest rates in the US to the same extent that they have done in the past, according to the Ministry of Finance.

In its National Economic Report of Bermuda 2008, the Ministry illustrates how interest rate changes on the Island have often mirrored those made by US central bank, the Federal Reserve.

But after a year of aggressive rate-cutting by the Fed in an attempt to bolster the flagging US economy, the gap between the Bermuda banks' base rates and the influential US Fed Funds rate has widened dramatically — to the disadvantage of those paying off mortgages and loans.

Currently the Fed's target interest rate is 0.25 percent. That compares to the Bank of Bermuda's 3.25 percent consumer base rate and Butterfield Bank's 3.75 percent loan rate.

A table that accompanied the report showed that the gap between the two biggest retail banks' rates and that of the Fed was never more than 100 basis points (one percent) between the second quarter of 2005 and the fourth quarter of 2007.

While interest rates have fallen to some extent in Bermuda, if that gap were still at 100 basis points, many borrowers would be paying hundreds of dollars less to meet their monthly mortgage repayments.

"In Bermuda, the level and pattern of changes in interest rates are set by the leading domestic banks," The National Economic Report states. "In establishing these rates, the banks are influenced primarily by the demand for credit by businesses and consumers and the availability of bank reserves to back the extension of loans.

"Moreover, because the Bermuda dollar is pegged to the US dollar, interest rate changes in Bermuda, at least historically, have closely paralleled similar changes in the United States."

The report observed: "In retrospect, during 2008, the Bermuda banks did not reduce their interest rates as frequently as the Federal Reserve rates were cut. Nor were the rate cuts as large.

"For example, in the fourth quarter of 2007, the Federal Funds rate was 4.25 per cent. At the same time, the Loan Rate at Butterfield was 5.25 per cent, and Bank of Bermuda's Base Rate was 5.0 per cent. The Bermuda-Federal Funds rate spreads were 1.00 and 0.75 per cent, respectively.

"By the end of 2008, the Federal Funds rate had been reduced to 0.25 per cent. Butterfield's rate was 3.75 per cent, a gap of 3.50 per cent. Bank of Bermuda's Base Rate was 3.25 per cent-a gap of 3.0 per cent."

This newspaper asked the two banks mentioned Bermuda's leading retail lenders why the gap had widened.

A spokesman for Butterfield bank said: "Butterfield reviews its lending and deposit rates on an ongoing basis with consideration for local and international market factors. Our rates are competitive locally.

"Although the value of the Bermuda dollar is pegged to that of the US dollar, the Bermudian economy has performed differently than that of the US, and there are different market forces influencing the movement of rates here.

"With respect to mortgages, the Bermuda housing market has shown strength relative to that of the US over the course of the last 18 months, with strong demand for housing continuing on the Island. As such, demand for mortgage and home equity lending products has continued to be strong. Prevailing rates reflect that reality."

A Bank of Bermuda spokeswoman said the HSBC-owned bank continually monitors global interest rates trends in order to provide competitive rates to its customers.

"In determining our base rate, Bank of Bermuda takes into account a number of factors not limited to but including the US Federal Funds Rate, along with local market conditions, so we can provide the best possible service to our customers.

"It should be noted that Bank of Bermuda's consumer interest rates are comparable and sometimes lower to the interest rates offered by consumer banks in the US.

"In fact, Bank of Bermuda's base rate has been lower than any other local competitor since the 3rd quarter of 2006. Furthermore, Bank of Bermuda applies any decrease in interest rates immediately to our customers' accounts so they can benefit immediately from the rate change. This is a unique offering in the Bermuda marketplace.

"We believe it is important to continue to maintain competitive personal and commercial base rates in order to support our residential mortgage customers and business clients."

It was not possible to get a comment from Capital G Bank by press time yesterday.