Ecuador May ‘Adjust’ Banks’ Interest Rates to Stabilize Lending

Ecuador’s central bank may “adjust” the maximum interest rates the nation’s lenders can charge for the first time since 2010 as global credit costs rise on signs the Federal Reserve will wind down its stimulus measures.

“We are analyzing the possibility of making an adjustment in the interest rates, not just in corporate rates, but also in consumer and micro credit rates, to allow credit to remain at an adequate level,” central bank President Diego Martinez said today in an interview in Cartagena, Colombia. “More than the speed at which it grows, we are interested that credit stays in magnitudes that are stable, and that monetary aggregates are stable, and not going up and down like a roller coaster.”

The availability of credit in Ecuador, which uses the U.S. dollar as its official currency, remains “high,” though it’s not growing at the speed of previous years, Martinez said. While economic growth in 2013 is forecast to slow to its lowest rate in three years, local banks are raising their borrowing costs toward their legal limits as profits plummet amid the government’s new regulations and procedure.

Banks’ combined profits, including Banco Pichincha CA and Banco de Guayaquil SA, Ecuador’s two biggest publicly-traded lenders, tumbled 42 percent in the first quarter, the biggest decline for the period since 2003, after Correa fast-tracked a tax bill through Congress during his re-election campaign last year forcing financial institutions to pay for a 43 percent boost in cash subsidies to low-income families.

Fed Stimulus

The losses are being compounded by a rout in emerging market assets and an increase in global interest rates sparked by Fed Chairman Ben Bernanke’s announcement last month that the Fed could reduce the pace of its record asset purchases used to restart the U.S. economy.

The total volume of new loans granted by private banks and financial institutions fell 16 percent in May from a month earlier, its biggest drop since January 2011, according to the central bank.

Martinez said Banco Central del Ecuador is also trying to avoid a drop in local liquidity levels to maintain dollarization by limiting the flow of capital out of the economy.

“Ecuador, unfortunately, not having its own currency, depends a lot on the velocity at which dollars enter and also the velocity at which they leave,” Martinez said. “Our aim is that the speed at which they enter is always higher than the speed at which they leave.”

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