A combination of rising prices for key staples such as food, rent and electricity, and sharp rises in the cost of borrowing are fueling a growing cost of living crisis.
Global factors, largely outside the control of the Cayman Islands, are making one of the most expensive places in the world even more expensive.
Over the next 18 months, that could push some families over the edge.
Inflation and interest rates may seem like esoteric concepts that most of us would rather not obsess over. But when your monthly mortgage doubles and a head of lettuce costs $7, it’s time to pay attention.
With the help of Simon Cawdery, director of HLX Management and host of the radio show ‘MoneySense’, we take a look at what’s happening with the economy and how it could affect households in the Cayman Islands.
What is happening with inflation and what is causing it?
Inflation reached a its highest point in Cayman in June, with prices more than 12% higher than in the same period last year. Fuel, housing, transportation, water, electricity and food, essentials for everyone in Cayman, have increased significantly.
Price increases, which eclipse the previous record after Hurricane Ivan in 2004, are largely beyond the control of the Cayman Islands. Inflation, like almost everything on the island, is imported.
The US and UK have seen double-digit inflation increases and applied it to the Cayman Islands with a shipping surcharge. Economists are still debating the causes, which include supply chain problems, rising labor costs, a surge in consumer demand after COVID, and shortages of raw materials and components.
COVID control measures in China, where millions of workers are on lockdown weekly, have slowed production and hampered supply lines. Meanwhile, the war in Ukraine, a major food exporter, and Russia’s subsequent standoff with the West have weighed on oil and grocery prices.
Why are interest rates increasing?
Interest rate hikes are a direct and inevitable response to inflation.
Central banks, such as the US Federal Reserve and the Bank of England, are legally required to keep inflation in check.
When prices rise, it is because the demand for goods is greater than the supply. We see a clear example in the automobile market where manufacturers have not been able to meet demand, causing a significant increase in prices.
Central banks cannot easily impact supply, so they must address the demand side instead.
Raising interest rates, as the Federal Reserve has done six times this year, by central banks drives up the cost of borrowing, including mortgages, car loans and credit cards.
If it sounds like a conspiracy to make you poorer, that’s exactly what it is.
The theory is that more of people’s wages will go toward those essential loan repayments, and less income will be available for discretionary spending. If enough people struggle to pay their existing bills, the demand for vacations or a new car declines, and eventually so do prices.
That seems hard. It will work?
Raising interest rates is a blunt tool to tackle inflation, but it is the only one available, and central banks are legally required to use it.
“The strategy will work,” says Cawdery, “because they’ll keep doing it until it works.”
Fed Chairman Jerome H. Powell said in a recent speech that the policy would inevitably bring pain to households and businesses.
But he insisted that doing nothing amid runaway price increases would be much worse.
“If price stability is not restored, the pain will be much greater,” he said, adding that “we will continue to do this until we are sure the job is done.”
Even if you thought otherwise, the Fed, like most central banks, is legally required to keep inflation below a certain threshold, usually set at around 2-4%.
Can Cayman take a different approach?
Although Cayman has its own currency, its own budget, and its own financial policy, it has almost no control over monetary policy.
The Cayman Islands dollar is pegged to the US dollar and all banks here are funded in US currency.
“All banks in the Cayman Islands simply have to raise interest rates to at least the same rate as the Federal Reserve, otherwise they couldn’t continue to operate profitably,” says Cawdery.
What does rising interest rates mean for the average person?
The largest single impact of rising interest rates for families in the Cayman Islands will be seen in their monthly mortgage payments.
For some people, those costs have almost doubled in the last year. They could double back before this is over.
If you have a $500,000 home loan with a 20-year payment plan, your mortgage would have increased from $3,7419 a month to $5,415 a month thanks to interest rate increases from 4% to 8%.