x Abu Dhabi, UAEThursday 27 July 2017

Carrot works best in conjunction with stick

Comment: The UAE's central bank governor has decided that the days of easy money, at least for the bankers, is over.

It has been one of the great money-making schemes of the past few years.

Penniless banks were first bailed out, then brought back into the black through the simplest of business models. They were lent money at minimal interest rates and allowed to lend them at almost usurious rates.

All the central bankers agreed cutting interest rates to almost zero in many parts of the world would halt the credit crunch. Small businesses are the lifeblood of any economy, they chirruped, so we must help to keep them afloat. And the banks?

They seized the lifeline and rather than bothering about the manufacturers, the service industries and the property developers, they chose to save themselves.

Now the UAE's Central Bank governor has decided the days of easy money, at least for the bankers, are over. The only problem is while he has called for them to cut interest rates for borrowers, such action would be voluntary, not mandatory.

Fat-cat bankers are likely to decide while a cut in rates might be nice for the borrowers, even nicer would be another year of huge profits and generous bonuses for themselves.

The Central Bank governor is doing the right thing for the economy, but maybe he needs to offer a stick instead of a carrot. And even so, there may be a sting in the tail.

If bankers do budge just a little, the threat of inflation is looming. Yesterday, the deputy governor of the Reserve Bank of Australia said he expected interest rates around the world to rise to combat inflation in the year ahead.

That's what bankers really want to hear.

rwright@thenational.ae