Rising prices for essential commodities such as food, rent and electricity, coupled with sharply rising borrowing costs, are increasing the cost of living crisis.
Global factors well beyond the control of the Cayman Islands have made one of the most expensive places in the world even more expensive.
Over the next 18 months, some families could be pushed to the brink.
Inflation and interest rates can seem like arcane concepts. But when your monthly mortgage doubles and lettuce he’s $7, it’s time to pay attention.
With the help of Simon Cawdery, director of HLX Management and host of the ‘MoneySense’ radio show, we analyze what’s happening in the economy and how it affects Cayman households. .
What is happening with inflation and what causes it?
inflation rate is record high In Cayman in June, prices were more than 12% higher than at the same time last year. Fuel, housing, transport, water, electricity and food – basic necessities for everyone in Cayman – have risen significantly.
Cayman is largely out of control with record-breaking price increases in the aftermath of 2004’s Hurricane Ivan. Like almost everything else on the island, inflation is imported.
Double-digit inflation is rising in both the US and UK, and the Cayman Islands is experiencing surcharges for shipping charges. Economists are still debating causes such as supply chain problems, rising labor costs, a post-COVID surge in consumer demand, and shortages of raw materials and parts.
In China, where millions of workers are locked down every week, coronavirus measures have slowed production and disrupted supply lines. Meanwhile, the war in Ukraine, a major exporter of food, and Russia’s ensuing conflict with the West has affected oil and food prices.
Why are interest rates rising?
An interest rate hike is a direct and inevitable response to inflation.
Central banks such as the Federal Reserve Bank of the United States and the Bank of England are legally obligated to keep inflation in check.
Prices soar because demand for goods exceeds supply. A clear example can be found in the automotive market, where manufacturers have failed to keep up with demand and prices have risen significantly.
Central banks cannot easily influence supply, so they must work on the demand side instead.
As the Fed has done six times this year, central bank interest rate hikes make borrowing costs higher for mortgages, auto loans, credit cards, and more.
If it sounds like a conspiracy to make you poor, it’s exactly that.
Theoretically, a large portion of people’s wages would go to repaying these essential loans, leaving less disposable income for discretionary spending. If enough people struggle to pay their existing bills, demand for vacations and new cars will drop, and eventually prices will drop.
It seems harsh. does it work?
Raising interest rates is a blunt tool to combat inflation, but it is the only one available, and central banks are legally obliged to use it.
“This strategy will work,” says Cawdery.
Fed Chairman Jerome H. Powell said in a recent speech that the policy would inevitably bring pain to households and businesses.
But he argued that doing nothing amid runaway price increases would be far worse.
“Failure to restore price stability would mean far more pain,” he said, adding: “We will continue to do so until we are confident the job is done.”
Even if he had other ideas, the Fed, like most central banks, would impose a legal requirement to keep inflation below a certain threshold (usually set at around 2-4%). I have.
Could Cayman take a different approach?
Cayman has its own currency, its own budget, its own fiscal policy, but little control over monetary policy.
The Cayman dollar is pegged to the US dollar and all banks here are funded in US dollars.
“All banks in Cayman must set interest rates at least as high as the Fed, otherwise they will not be able to continue to operate profitably,” says Cawdery.
What does rising interest rates mean for the average person?
The biggest impact of rising interest rates on Cayman Islands families will be seen in their monthly mortgage repayments.
For some people, those costs have nearly doubled in the past year. They could double again before this is over.
If you have a $500,000 mortgage with a 20-year amortization plan, your mortgage will increase from $3,7419 to $5,415 per month as interest rates rise from 4% to 8%.