Apart from the en­cour­age­ment to the Min­istry of Fi­nance to re­move all re­stric­tions on cur­rent in­ter­na­tion­al trans­ac­tions–while pro­vid­ing enough for­eign ex­change to meet de­mand for all cur­rent in­ter­na­tion­al trans­ac­tions–last Thurs­day’s con­clud­ing state­ment by the mis­sion from the In­ter­na­tion­al Mon­e­tary Fund (IMF) con­tains some ad­vice for the Cen­tral Bank.

The IMF team point­ed out that the Cen­tral Bank of Trinidad and To­ba­go (CBTT) has main­tained its re­po rate at 3.50 per cent since March 2020 to sup­port the re­cov­ery of the econ­o­my.

“In­creas­ing the pol­i­cy rate should be se­ri­ous­ly con­sid­ered to con­tain in­fla­tion­ary pres­sures and nar­row the neg­a­tive in­ter­est rate dif­fer­en­tials with the US mon­e­tary pol­i­cy rate. This would al­so help mit­i­gate po­ten­tial risks of cap­i­tal out­flows and re­duce in­cen­tives for ex­ces­sive risk tak­ing that could threat­en fi­nan­cial sta­bil­i­ty,” said the IMF team.

The first point to note about the IMF mis­sion’s con­clud­ing state­ment is the lan­guage: In­creas­ing the re­po rate “should be se­ri­ous­ly con­sid­ered” by the Cen­tral Bank “to con­tain in­fla­tion­ary pres­sures.” The use of the phrase “se­ri­ous­ly con­sid­ered” is note­wor­thy.

The in­fla­tion­ary pres­sures, re­ferred to by the IMF mis­sion, in­clude the fact that the head­line in­fla­tion rate, which in­cludes all items in the Re­tail Price In­dex, in­creased by 8.7 per cent in De­cem­ber 2022, com­pared with De­cem­ber 2021, ac­cord­ing to da­ta on the Cen­tral Sta­tis­ti­cal Of­fice (CSO) web­site.

In ad­di­tion, food and non-al­co­holic bev­er­ages were 17.3 per cent high­er in De­cem­ber 2022, than in De­cem­ber 2021. Trans­porta­tion was 14.6 per cent high­er at the end of last year than at the end of 2021, while fur­nish­ings, house­hold equip­ment and rou­tine main­te­nance of the house rose by 9.3 per cent.

The the­o­ry be­hind the IMF’s think­ing is that if it costs more to bor­row mon­ey–to buy a car, get a mort­gage for a house, go on va­ca­tion or pay for med­ical treat­ment at a pri­vate in­sti­tu­tion–few­er peo­ple would en­ter in­to debt agree­ments. Or peo­ple would bor­row less mon­ey.

In my view, the Cen­tral Bank has de­layed rais­ing the pol­i­cy (re­po) rate–which in­flu­ences all oth­er in­ter­est rates in T&T–be­cause it has formed the view that in­fla­tion at 8.7 per cent is tran­si­to­ry. Note the lan­guage in its De­cem­ber 2022 Mon­e­tary Pol­i­cy An­nounce­ment, in which the Cen­tral Bank’s mon­e­tary pol­i­cy com­mit­tee “not­ed with con­cern the ris­ing path of do­mes­tic in­fla­tion, al­bi­et dom­i­nat­ed in 2022 by ex­ter­nal or weath­er-re­lat­ed shocks as well as the fu­el sub­sidy re­duc­tion.” The Cen­tral Bank was not con­cerned enough to in­crease the re­po rate.

It is the Cen­tral Bank’s view, I be­lieve, that the ex­ter­nal shocks and the flood­ing events last year, which drove up the prices of for­eign and lo­cal foods re­spec­tive­ly, are tem­po­rary and that the econ­o­my will ad­just to the in­crease in the prices of fu­el.

The point, though, is this: While re­tail­ers in this coun­try are most­ly quick to pass on high­er prices to their cus­tomers, they are gen­er­al­ly much slow­er to pass on low­er prices.

It is in­ter­est­ing to note that the av­er­age price of reg­u­lar (su­per) gaso­line in the US was 19 per cent low­er this week than one year ago. And the av­er­age price of diesel in the US was 15 per cent low­er this week than one year ago.

If the Gov­ern­ment is in­ter­est­ed in mit­i­gat­ing the im­pact of high­er prices on the pop­u­la­tion, per­haps it should show some lead­er­ship by re­duc­ing the cost of fu­els.

In­ter­est rate dif­fer­en­tials

Central Bank Governor, Dr Alvin Hilaire

This is­sue of the neg­a­tive in­ter­est rate dif­fer­en­tial with the US mon­e­tary pol­i­cy rate is quite im­por­tant be­cause it refers to the fact that in­ter­est rates in the US have risen in the last three years, while in­ter­est rates in T&T have not.

In June 2020, the TT-US in­ter­est rate on three-month trea­suries was +0.81 (or 81 ba­sis points), ac­cord­ing to the June 26, 2020, mon­e­tary pol­i­cy an­nounce­ment by the Mon­e­tary Pol­i­cy Com­mit­tee of the Cen­tral Bank.

Ac­cord­ing to the Eco­nom­ic Bul­letin Jan­u­ary 2023: “The TT-US 91-day dif­fer­en­tial widened to -392 ba­sis points in De­cem­ber 2022 com­pared with -278 ba­sis points in Sep­tem­ber 2022.”

That means the dif­fer­ence be­tween a three-month T&T trea­sury and a sim­i­lar US in­vest­ment last De­cem­ber was -3.92 per cent. Put an­oth­er way, it means that the an­nu­alised in­ter­est rate that an in­vestor could earn hold­ing a three-month, US-dol­lar trea­sury bill in De­cem­ber 2022 was 3.92 per cent high­er than a sim­i­lar TT-dol­lar in­vest­ment.

Ac­cord­ing to the Cen­tral Bank web­site, in Feb­ru­ary 2023, the an­nu­alised rate of a three-month T&T trea­sury bill was 0.59 per cent.

In fact, the en­tire spec­trum of in­ter­est rates in the US is high­er, up to four years, seems to be high­er than in T&T.

Some­one in­vest­ing in a short-term US in­vest­ment this year earned a sig­nif­i­cant­ly high­er re­turn than some­one in­vest­ing in a sim­i­lar TT-dol­lar in­vest­ment.

So, the ques­tion is why would ANY in­vestor have pur­chased a TT-dol­lar trea­sury bill for one year earn­ing 1.20 per cent in Feb­ru­ary 2023, when a US-dol­lar trea­sury for the same pe­ri­od was 4.65 per cent?

The an­swer, I be­lieve, is that the T&T trea­sury bill mar­ket is dom­i­nat­ed by the coun­try’s fi­nan­cial in­sti­tu­tions who in­vest in the short-term, TT-dol­lar trea­suries be­cause they need to match the debt ma­tu­ri­ties on their bal­ance sheets.

So, it is im­por­tant to note the IMF’s rec­om­men­da­tion that in­creas­ing the pol­i­cy rate should be se­ri­ous­ly con­sid­ered “to nar­row the neg­a­tive in­ter­est rate dif­fer­en­tials with the US mon­e­tary pol­i­cy rate. This would al­so help mit­i­gate po­ten­tial risks of cap­i­tal out­flows and re­duce in­cen­tives for ex­ces­sive risk tak­ing that could threat­en fi­nan­cial sta­bil­i­ty.”

Has the Cen­tral Bank en­cour­aged cap­i­tal out­flows in the last three years by not in­creas­ing the pol­i­cy (re­po) rate “to nar­row the neg­a­tive in­ter­est rate dif­fer­en­tials with the US mon­e­tary pol­i­cy rate?”

There is lit­tle ev­i­dence that peo­ple are park­ing their mon­ey in for­eign-cur­ren­cy ac­counts at lo­cal com­mer­cial banks. In De­cem­ber 2022, for­eign cur­ren­cy de­posits at the coun­try’s com­mer­cial banks to­taled TT$26.17 bil­lion. That’s al­most flat com­pared with the TT$26 bil­lion in those for­eign-cur­ren­cy ac­counts in De­cem­ber 2021 and on­ly 5.48 per cent high­er than the TT$24.81 held in those ac­counts in De­cem­ber 2020.

Could it be that lo­cal com­pa­nies and high net worth in­di­vid­u­als who are earn­ing for­eign ex­change are keep­ing most of that mon­ey out­side of T&T be­cause both the pre­vail­ing lo­cal in­ter­est rates and the main ex­change rate re­main un­com­pet­i­tive?

On the ex­change rate, as re­port­ed in the Guardian pre­vi­ous­ly, the IMF mis­sion said:

“IMF staff en­cour­ages the au­thor­i­ties to re­move all re­stric­tions on cur­rent in­ter­na­tion­al trans­ac­tions while pro­vid­ing suf­fi­cient for­eign ex­change to meet de­mand for all cur­rent in­ter­na­tion­al trans­ac­tions.”

The prospect of the Min­istry of Fi­nance heed­ing that en­cour­age­ment, at this time, is slim to none.

It is note­wor­thy that the IMF mis­sion’s con­clud­ing state­ment states:

“The au­thor­i­ties have con­sent­ed to the pub­li­ca­tion of this state­ment. The views ex­pressed in this state­ment are those of the IMF staff and do not nec­es­sar­i­ly rep­re­sent the views of the IMF’s ex­ec­u­tive board.”