An­tho­ny Wil­son

Two Fri­days ago, on March 27, the Cen­tral Bank is­sued its mon­e­tary pol­i­cy an­nounce­ment in which it re­port­ed that Mon­e­tary Pol­i­cy Com­mit­tee (MPC) had "agreed to raise the 're­po' rate for a fourth con­sec­u­tive time by 25 ba­sis points to 3.75 per cent."

One of the more ex­tra­or­di­nary as­pects of this state­ment was its head­line: "In­ter­est rate hike need­ed to pro­tect T&T econ­o­my."

The ob­vi­ous ques­tions are:

1) What is the T&T econ­o­my be­ing pro­tect­ed against? and

2) Will in­creas­ing in­ter­est rates pro­vide the pro­tec­tion that the Cen­tral Bank seems to be­lieve the do­mes­tic econ­o­my needs?

In ex­plain­ing why the MPC "agreed" to in­crease the re­po rate to 3.75 per cent, the Cen­tral Bank cit­ed three fac­tors that pro­vide some clues that may help to dis­cern what the do­mes­tic econ­o­my is be­ing pro­tect­ed against.

The MPC "agreed" to in­crease rates be­cause of "the po­ten­tial for high­er do­mes­tic in­fla­tion in the medi­um term," and be­cause of "the rel­a­tive­ly pos­i­tive growth out­look for 2015."

The third fac­tor–the pos­si­bil­i­ty that the US Fed­er­al Re­serve may in­crease in­ter­est rates in the third quar­ter of this year–is be­yond the con­trol of the T&T au­thor­i­ties in a way that the first two clear­ly are not.

The MPC al­so agreed "to con­tin­ue with an ag­gres­sive pro­gramme to ab­sorb ex­cess liq­uid­i­ty so as to strength­en the im­pact high­er in­ter­est rates are ex­pect­ed to have through­out the fi­nan­cial sys­tem.

On the is­sue of high­er do­mes­tic in­fla­tion in the medi­um term, the Cen­tral Bank not­ed that "head­line in­fla­tion slowed for the third con­sec­u­tive month in Feb­ru­ary 2015 to just over 6 per cent from 9 per cent in No­vem­ber 2014."

Why is the Cen­tral Bank in­creas­ing in­ter­est rates if the rate of in­fla­tion is de­clin­ing?

The rea­son is that "this eas­ing in head­line in­fla­tion may be short lived, as in­fla­tion­ary pres­sures are ex­pect­ed to pick up in the rest of 2015 due to a num­ber of fac­tors."

As far as can be de­ter­mined, the Cen­tral Bank says there are three rea­sons why in­fla­tion­ary pres­sures are ex­pect­ed to be high­er lat­er on in 2015 than in Feb­ru­ary:

�2 Growth of con­sumer cred­it re­mains ro­bust, in­creas­ing by near­ly 8.5 per cent in Jan­u­ary 2015, sug­gest­ing con­sumers are still will­ing to spend de­spite neg­a­tive sen­ti­ment sur­round­ing falling oil prices;

�2 Cur­rent and ex­pect­ed set­tle­ment of wage ne­go­ti­a­tions for teach­ers, civ­il ser­vants and oth­er pub­lic sec­tor work­ers with con­sid­er­ably large retroac­tive pay­ments and salary in­cre­ments will boost con­sumer spend­ing and fur­ther stoke in­fla­tion­ary pres­sures;

�2 The ex­pan­sion­ary fis­cal stim­u­lus re­mains on track. Cen­tral Gov­ern­ment's spend­ing on its cap­i­tal pro­gramme was high­er by 7 per cent in the first four months of the 2015 fis­cal year when com­pared to the cor­re­spond­ing pe­ri­od one year ago.

In pick­ing apart these fac­tors:

a) High­er con­sumer cred­it–It seems quite ex­tra­or­di­nary, even counter-in­tu­itive, that con­sumer cred­it was 8.5 per cent greater in Jan­u­ary this year than in Jan­u­ary 2014. This means that the con­sumers of T&T are bor­row­ing to spend this year–when the prices of T&T's en­er­gy ex­ports have col­lapsed–at a pace that is sig­nif­i­cant­ly high­er than one year ago.

Could it be, then, that the Cen­tral Bank is at­tempt­ing to pro­tect T&T res­i­dents from them­selves?

What does it mean that con­sumer are bor­row­ing at a faster rate in 2015 than one year ago?

Is there a link be­tween the "ro­bust" con­sumer cred­it and the Prime Min­is­ter's speech on the State of the Econ­o­my on Jan­u­ary 8, in which she said: "I am of the firm view that this is no time for sud­den changes in the di­rec­tion of eco­nom­ic de­vel­op­ment poli­cies. Such an ap­proach will neg­a­tive­ly im­pact your com­fort, in­vestor con­fi­dence, busi­ness ex­pan­sion and em­ploy­ment. I am al­so of the firm view that us­ing a pe­ri­od of chal­lenges to pro­mote fear and pan­ic will be ir­re­spon­si­ble, and will have the im­pact of cre­at­ing prob­lems where in fact no such prob­lems ex­ist."

From this quote, it is clear to me that this na­tion­al mood of com­fort and well­be­ing–in the face of an in­evitable fu­ture of high­er tax­es and a re­duc­tion in trans­fers and sub­si­dies–was cre­at­ed by the Prime Min­is­ter's "Don't Wor­ry, Be Hap­py" speech.

Is the Cen­tral Bank try­ing to pro­tect the coun­try from the lack of con­cern about the fu­ture laid bare by the 8.5 per cent in­crease in con­sumer cred­it?

b) Back­pay will boost spend­ing–The Cen­tral Bank is right when it states that if the Gov­ern­ment de­cides to make lump­sum pay­ments of back­pay to pub­lic ser­vants and teacher that this will "boost con­sumer spend­ing and fur­ther stoke in­fla­tion­ary pres­sures." If the Cen­tral Bank knows this, one must as­sume that the Min­istry of Fi­nance knows this as well.

So, it must be as­sumed that Min­is­ter of Fi­nance, Lar­ry Howai, is aware that if pub­lic ser­vants and teach­ers get the $2 bil­lion in back­pay owed to them as a lump­sum in June or Ju­ly, they will go out on spend it at ama­zon.com and in the pur­chase of cars, fridges, stoves, wash­ing ma­chines, dri­ers and even dish­wash­ers.

And to this fig­ure of $2 bil­lion must be added the $1.75 bil­lion that is due to be dis­trib­uted to non-as­sent­ing hold­ers of Cli­co's Ex­ec­u­tive Fe­lix­i­ble Pre­mi­um An­nu­ities and to British Amer­i­can (BAT) hold­ers of short-term in­vest­ment prod­ucts by June.

If Mr Howai is aware of that a $3.75 bil­lion tsuna­mi of spend­ing is about to de­scend on the coun­try that would "fur­ther stoke in­fla­tion­ary pres­sures," what is he go­ing to do about it?

Will he pro­ceed to make lump­sum dis­burse­ments of monies to Cli­co/BAT pol­i­cy­hold­ers and back­pay to pub­lic ser­vants and teach­ers–which would suit his par­ty's po­lit­i­cal agen­da to win this year's gen­er­al elec­tion–or will he stag­ger those pay­ments over a three-month pe­ri­od as the St Au­gus­tine cam­pus of the Uni­ver­si­ty of the West In­dies is do­ing for its aca­d­e­m­ic and non-acad­e­mix staff?

Will Mr Howai en­sure that there are ad­e­quate fixed in­come and eq­ui­ty in­vest­ment op­por­tu­ni­ties–such as the tax-free sav­ings bonds, shares in Phoenix Park Gas Proces­sors and the en­hanced tax sav­ings as a re­sult of a $50,000 al­lo­ca­tion to an­nu­ities–avail­able to pub­lic ser­vants, teach­ers and pol­i­cy­hold­ers?

Or will those pub­lic ser­vants, teach­ers and pol­i­cy­hold­ers who re­alise that they would be worse off in the long run if they were to go out and blow their lump­sums on­ly have the op­tion of in­come funds and de­posit ac­count earn­ing 1 per cent or less in in­ter­est?

If you know some­thing bad is go­ing to hap­pen through your own ac­tions, wouldn't it be the re­spon­si­ble and ra­tio­nal ap­proach to put mit­i­ga­tion mea­sures in place?

Is the Cen­tral Bank try­ing to pro­tect T&T from the po­lit­i­cal sea­son that we are in?

c) Ex­pan­sion­ary fis­cal spend­ing–Again, if the Min­is­ter of Fi­nance knows that ex­ces­sive Gov­ern­ment spend­ing is go­ing to con­tribute to a tsuna­mi of con­sumer cred­it and spend­ing, what is he go­ing to do about it?

At the start of this piece, the sec­ond ques­tion that was asked was: Will in­creas­ing in­ter­est rates pro­vide the pro­tec­tion that the Cen­tral Bank seems to be­lieve the do­mes­tic econ­o­my needs?

The an­swer is that the con­ven­tion­al think­ing is that in­ter­est rates take be­tween nine and 18 months to im­pact eco­nom­ic ac­tiv­i­ty–and this as­sumes lend­ing rates are go­ing up across the board in T&T.

Clear­ly they are not, as the Cen­tral Bank has been very care­ful not to in­crease the mort­gage mar­ket ref­er­ence rate from 2.25 per cent as this is some­thing that could re­al­ly have an im­pact on the pub­lic's sen­ti­ment.

All of this does not di­ag­nose what could be the re­al prob­lem that the Cen­tral Bank is at­tempt­ing to pro­tect T&T from, which is the de­clin­ing for­eign ex­change re­serves.

There is a link be­tween in­creas­ing in­ter­est rates and T&T's for­eign re­serves as the Cen­tral Bank at­tempts to make T&T as­sets more valu­able, but that is a sto­ry for an­oth­er day.