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New banking initiative may increase Solomons interest rates 25/11/2008

The chief of Solomon Islands Central Bank says a new policy, requiring greater deposits by commercial banks with the central bank, will effect interest rates.

The Solomon Islands Central Bank says it should hold 7.5 per cent of each bank's total deposit liabilities.

It also requires a minimum cash deposit, which ensures a bank's minimum liquidity.

Without it, a bank could lack the funds to pay out cash on demand to customers.

Central Bank Governor, Denton Rarawa, says the purpose of the new requirement is to ensure Solomon Islands banks always have money available for withdrawals.

But he says the move could affect interest rates on both loans and deposits.

"That means they will have less to lend to the public or to their clients," he said.

"Now in that case, with lending tightening, interest rates would go up, lending rates might go up but at the same time because liquidity is being squeezed in the system, interest rates on deposits will also have to go up if banks want to attract new deposits or if they want to get more liquidity from the system."

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