Trinidad and Tobago’s central bank left its benchmark repo rate steady at 3.50 percent, saying its “unprecedented” rate cut in March had boosted liquidity in the domestic financial system substantially and it expects this will have a stronger effect on credit as the economy opens up.
The Central Bank of Trinidad and Tobago (CBTT) said its 150-basis-point rate cut in March, along with a 300 point cut in banks’ reserve requirement, had led to an almost immediate reduction in banks’ prime lending rates to 7.50 percent from 9.25 percent.
On March 17 the bank’s monetary policy committee decided to slash the rate and lower the reserve requirement at a special meeting in light of the “unprecedented nature and magnitude of the pandemic, exacerbated by the energy price drop.”
Since this monetary easing, liquidity in the financial system has surged, with excess reserves at CBTT reaching over TT$110 billion by mid-June but there still hasn’t been a significant pickup in private sector credit as businesses are still waiting for a recovery in demand, the bank said.
But based on history, the central bank expects the impact of its rate cut to take several months to fully filter into interest rates and credit.
Meanwhile, it said economic activity in Trinidad and Tobago is gradually resuming following several months of lockdown to prevent the spread of the Covid-19 pandemic.
Noting the rise in liquidity, the central bank said it decided to maintain its repo rate today and was continuing to monitor developments and “will take further action as necessary.”
Latest data show lending to businesses had declined 5.7 percent year-on-year in March, reflecting a pre-pandemic trend, but despite the gloomy environment, the country’s international reserves remained steady at US$6.8 billion on June 19 – around 8 months of imports – and lower interest rates in the U.S. had improved the TT-US rate differential to 81 basis points on 3-month Treasuries.
But CBTT said the situation and outlook on the international front “warrant concern,” and the macroeconomic environment can best be described as “intense and uncertain,” constrained for the most part by the fiscal space available to governments.
Inflation in Trinidad and Tobago rose to 0.5 percent in February from 0.4 percent in January.
The Central Bank of Trinidad and Tobago released the following statement:
“In the context of the global pandemic situation, at its mid-March 2020 meeting the Monetary Policy Committee (MPC) of the Central Bank of Trinidad and Tobago lowered the Repo rate by an unprecedented 150 basis points, and reduced the reserve requirement by 3 per cent to 14 per cent of banks’ deposit liabilities. Almost immediately, commercial banks cut their prime lending rates, from an average of 9.25 per cent to 7.50 per cent. Available information to the end of March shows a decline in the weighted average loan rate to 7.52 per cent from 7.72 per cent three months earlier and a marginal narrowing of interest spreads to 6.84 per cent from 7.05 per cent over this period. Liquidity surged, with excess reserves at the Central Bank reaching over TT$10 billion in mid-June 2020, and there is little indication that there has yet been a significant pickup in private sector credit as businesses await a recovery in demand. Based on historical experience, the impact of the monetary policy actions will take several months to fully filter into interest rates and credit.
Economic activity in Trinidad and Tobago is gradually resuming, following several months of lockdown. Not unexpectedly, earlier stay-at-home requirements resulted in a lull in activity in most sectors and a reduction in disposable incomes. Meanwhile, the inflation rate remained near zero — 0.4 per cent year-on-year in March 2020 according to available Central Statistical Office data. The latest financial indicators show that lending to businesses declined by 5.70 per cent year-on-year in March 2020, reflecting a pre-pandemic trend evident for several months. Despite the gloomy environment, the country’s international reserves position remained strong at US$6.8 billion on June 19, 2020 (around 8 months of import cover), boosted by a recent US$400 million drawdown from the Heritage and Stabilization Fund. Falling interest rates in the US market resulted in an improvement of the TT-US rate differential to 81 basis points on the three month treasuries in late June.
The MPC evaluated the foregoing factors carefully, in particular the substantial liquidity in the domestic system and the expectation that the March 2020 monetary policy actions will have a stronger effect on credit as the domestic economy opens up. On this basis, the MPC decided to maintain the repo rate at 3.50 per cent. The Central Bank continues to monitor and analyse developments and will take further action as necessary.”
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