April 2008 Report - Central Bank of Trinidad and Tobago

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CENTRAL BANK OF TRINIDAD AND TOBAGO MONETARY POLICY REPORT APRIL 2008 Adding to our concerns about inflation are three important considerations: First, the widely-held view that the recent escalation in food import prices is structural and unlikely to be reversed anytime soon. Second, delays in the implementation of the government’s new agricultural thrust involving the establishment of a number of large farms, an increase in infrastructural investment in agriculture and the introduction of a programme of fiscal incentives to agriculture; and Third, there has been a noticeable rise in inflation expectations driven by the surge in food prices. Higher inflation expectations could set in train higher mark-ups in anticipation of future price increases and an increase in wage pressures. Given these many challenges, strong measures on several fronts will be required to ensure that double-digit inflation does not become entrenched. As suggested in an earlier Monetary Policy Report, this may be the time to consider some kind of social compact, while the long term measures take root. Page 12
CENTRAL BANK OF TRINIDAD AND TOBAGO MONETARY POLICY REPORT APRIL 2008 Chart 7 Monetary Policy Responses Dec. 2005: Liquidity Management Measures Commercial banks deposited TT$1 billion in an interest-bearing account at the Central Bank for a minimum period of one year. Special Deposit rate reduced to zero. June 2006: Commercial banks deposited TT$500 million in an interest-bearing account at the Central Bank for a minimum period of one year. Sept. 2006: Commercial banks were required to hold, on a temporary basis, a secondary reserve requirement of 2 per cent of their prescribed liabilities, effective October 4 2006 remunerated at 350 basis points below the ‘Repo’ rate. Sept 2006: Parliament approved an increase in government borrowing for Open Market Operations from $8 billion to $15 billion. Nov 2006: Additional steps were taken by the Central Bank in consultation with the Government to increase liquidity absorption. To this end, a TT$700 million, 8-year government bond was issued to the public in November, the proceeds of which have been sterilized. Feb 2007: Another bond in the advertised amount of $300 million was offered, but due to overwhelming public support, the actual size was increased to $674.3 million with a maturity date of August 9, 2012 and a coupon rate of 7.80 per cent. The proceeds of this bond were also sterilized. April 2007: A third bond aimed at liquidity absorption was initially offered in the amount of $650 million, but again due to the public’s reception of the issue, the bond’s value was raised to $1 billion with a coupon rate of 8.00 per cent and a tenor of 7 years. The proceeds of this bond were sterilized. May 2007: A 5-year Treasury Note in the amount of $500 million was issued to the commercial banks with a coupon rate of 6.00 per cent. June 2007: The commercial banks’ deposit of $500 million in an interest-bearing account at the Central Bank was rolled over for another year. Dec 2007: The commercial banks’ deposit of $1 billion in an interest-bearing account at the Central Bank was rolled over for another year. Feb 2008: The cash reserve requirement applicable to commercial banks was increased by 2 percentage points to 13 per cent of prescribed liabilities from 11 per cent, with effect from February 27 2008. Part II - Monetary Policy With inflation reaching 10 per cent in October 2006, the Central Bank revised its anti-inflation strategy shifting focus to liquidity absorption rather than on changes in the policy interest rate. This change was introduced to address the persistent liquidity overhang which has blunted the effectiveness of the policy interest rate by reducing the extent to which changes in the policy rate are transmitted to market interest rates. In the new approach, liquidity absorption was to be effected through auctions of long-term securities, the proceeds of which were to be sterilized in the Central Bank. These special auctions provided new investment opportunities for large spending units but were also designed to attract lower income individuals away from spending and into longer term investing. Accordingly, in the period (November 2006 to December 2007), special sterilization government bonds amounting to $3,103 million were issued in maturities ranging from 5.5 to 10 years. While most of these bonds were taken up by institutional investors, arrangements were also put in place to attract small investors. The bond auctions were but one of a range of antiinflationary measures that were implemented (Chart 7). Some of the other steps taken were: (i) the imposition of a secondary reserve requirement on the commercial banks; (ii) a special issuance of government securities to the banks; and (iii) an intensified programme of open market operations. Through the net issue of open market bills, the Central Bank removed $6,649 million from the financial system in 2007 compared to $626 million in 2006. These measures resulted in a significant reduction in banks’ excess liquidity and contributed to reduction in core and headline inflation through most of 2007. Page 13
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Correspondence relating to the Mone
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April 2008 Report - Central Bank of Trinidad and Tobago

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