Pursuant to your instructions, analyses of the bank's net interest margin, net interest income, and market value of portfolio equity were performed for three interest rate scenarios. The results of the analyses are attached as an exhibit to this report.
Based on the above referenced analyses and an assessment of current and projected economic conditions, it is suggested that the bank adopt an interest rate policy with an objective of maintaining a net interest rate margin equal to or higher than the 90-day Treasury bill rate plus 0.25 percent. At the present time, the net interest rate margin for the bank is meeting this objective. As the findings of the analyses presented in the exhibit indicate, however, any scenario analyzed other than the static rates option will cause the interest rate margin for the bank to drop below the minimum suggested interest rate policy.
Trends in the United States financial markets support the suggested interest rate policy, as well as indicating that some change in the bank's investment portfolio composition will be required to assure that the objective of the interest rate policy is attained. With a federal budget compromise agreed upon between the Congress and the Administration, the relevant national economic consideration for the bank is the strength of the so-called real economy. The evidence indicates that inflation risks are rising, that an upward adjustment in bond market yields, and that a steepening yield curve at the short-end of the term structure are occurring in the United States economy. Demand in the economy slowed in the third-quarter from the real increase in gross national product (GNP) of 2.8 percent recorded in the earlier months of 1996. Inflation is expected to be adversely affected as production falls behind final sales. Further, the labor market is tight and the employment cost index indicated that wages in the private sector are rising.
With demand and supply ...