reduce interest rates as a result of a build-up in savings, banking officials said yesterday.

The Bermuda Monetary Authority this week reported that the lending institutions recorded significant increases in Bermuda dollar deposits in the third quarter of the year.

The increases was seen as a sign that the economy was gaining more strength.

But observers said it could also lead to lower interest rates if deposits continued to grow.

Bermuda dollar deposits increased by $53 million to $1.024 billion in the quarter, a 5.4 percent increase. This was the fourth consecutive quarterly jump, the BMA said.

The biggest increase came in higher yield demand deposits, which grew $38 million to $317 million, a 13.6 percent jump. Demand deposits increased 2.7 percent or $12 million to $450 million and savings were up 1.6 percent or $4 million to $258 million.

The banks' Bermuda dollar assets increased to $834 million from $819 million in the second quarter, a 1.7 percent increase. Much of the growth was due to a $16 million increase in the value of "other assets''. Loans and advances declined $1 million to $622 million.

In deposit companies, assets increased $37 million to $999 million, with loans and mortgages increasing 3.6 percent or $25 million to $712 million. This was at least the seventh straight quarterly increase.

Customer deposits increased by $35 million or four percent to $915 million.

Overall, total deposit liabilities increased 4.9 percent to $1.939 billion, loans and advances declined by $1 million while mortgages increased by $24 million.

Surplus deposits increased by 18.7 percent to $349 million.

BMA deputy general manager Mrs. Marcia Woolridge-Allwood said the increase in Bermuda dollar deposits reflected the increased strength of the economy and growing liquidity.

Bank of N.T. Butterfield chief executive officer Mr. Michael Collier agreed, but added it was not clear how much of the increased liquidity was a result of people disposing of investments as opposed to increasing savings.

Mr. Collier predicted that local interest rates would come under pressure to fall further as a result of increased liquidity.

He said there were clear signs of recovery in the real estate market, although it was not certain whether increases in mortgages had come as a result of several large mortgages being issued or a growth in the market for smaller homes.

He said the decline in loans and advances was probably a result of companies reducing debt and inventory rather than a decline in business activity.

"People are in a stronger liquidity situation. More and more people are bringing in stock `just in time' and putting it right on the shelves rather than storing in a warehouse,'' he said. "People are also using their real property more effectively or are reducing their rental space.'' A Ministry of Finance spokesman said the figures also showed banks and deposit companies were continuing to exercise tight control over credit and noted that the difference between rates paid in Bermuda -- between 21 percent and seven percent -- and the considerably low rates in the US was probably proving to be expensive for the banks.

"It suggests that there is some scope for reduced rates,'' the spokesman said. "If the rate of deposit growth continues in 1994, Bermuda businessmen will be penalised as they cannot borrow overseas.'' The BMA's also revealed foreign currency deposits at the banks fell.

In foreign currencies, the banks reported a 4.8 percent decrease in deposits to $6.023 billion, while assets fell $174 million to $7.622 billion.

Mr. Collier said the foreign currency sector tended to be more volatile than the Bermuda dollar sector.

"Money tends to be there one quarter and not there the next,'' he said. "We get a lot of movement in and out.''