For the first time since March 2020, at the on­set of the COVID-19 pan­dem­ic, the Cen­tral Bank of T&T yes­ter­day held a spe­cial meet­ing of its mon­e­tary pol­i­cy com­mit­tee (MPC).

In a news re­lease fol­low­ing the spe­cial meet­ing, the MPC an­nounced that it was cut­ting its re­serve re­quire­ment from 14 per cent of pre­scribed li­a­bil­i­ties to 10 per cent. The pre­scribed li­a­bil­i­ties are de­posits and short term bor­row­ings that com­mer­cial banks are re­quired to hold at the Cen­tral Bank. Those pre­scribed li­a­bil­i­ties can­not be used by com­mer­cial banks as the ba­sis of loans to cus­tomers and they earn no in­ter­est

The Cen­tral Bank said it took the de­ci­sion to cut the re­serve re­quire­ment be­cause of a de­cline in ex­cess re­serves of com­mer­cial banks.

“The MPC ex­am­ined the re­cent de­cline in ex­cess re­serves of com­mer­cial banks—the de­posits held by banks at the Cen­tral Bank in ex­cess of the re­quired re­serve ra­tio of 14 per cent of pre­scribed li­a­bil­i­ties (de­posits and short term bor­row­ings). The dai­ly av­er­age of ex­cess re­serves mea­sured $2.76 bil­lion from Ju­ly 1 to Ju­ly 18, 2024 com­pared to $3.91 bil­lion in June 2024,” said the Cen­tral Bank.

Re­spond­ing to a query from Guardian Me­dia, the Cen­tral Bank dis­closed that the pre­scribed li­a­bil­i­ties of the com­mer­cial banks as at Ju­ly 3, 2024 to­taled $95.9 bil­lion. At 14 per cent the re­serve re­quire­ment would be $13.42 bil­lion, while at 10 per cent the com­mer­cial banks would be re­quired to hold $9.59 bil­lion in a non-in­ter­est earn­ing cash re­serve ac­count at the Bank.

The Cen­tral Bank said the MPC reaf­firmed the ap­pro­pri­ate­ness of the over­all stance of mon­e­tary pol­i­cy, as ar­tic­u­lat­ed most re­cent­ly in its June 28, 2024 Mon­e­tary Pol­i­cy An­nounce­ment.

“At the same time, the Com­mit­tee con­sid­ered that, in the cur­rent cir­cum­stances, a low­er­ing of the re­serve re­quire­ment, ac­com­pa­nied by greater re­liance on open mar­ket op­er­a­tions (the pur­chase and sale of se­cu­ri­ties by the Cen­tral Bank to af­fect liq­uid­i­ty), would have an im­me­di­ate im­pact on liq­uid­i­ty.

“This com­bi­na­tion is al­so con­sis­tent with the Cen­tral Bank’s long­stand­ing ob­jec­tive of pro­gres­sive­ly mov­ing to­wards more mar­ket-de­ter­mined in­stru­ments of mon­e­tary pol­i­cy.

“Tak­ing all fac­tors in­to con­sid­er­a­tion, the MPC de­cid­ed to re­duce the pri­ma­ry re­serve re­quire­ment of com­mer­cial banks from 14 per cent to 10 per cent of pre­scribed li­a­bil­i­ties with ef­fect from the re­serve week be­gin­ning Ju­ly 24, 2024,” said the Cen­tral Bank.

The next Mon­e­tary Pol­i­cy An­nounce­ment is sched­uled for Sep­tem­ber 27, 2024.

The last time the Cen­tral Bank re­duced its re­serve re­quire­ment was on March 17, 2020, when it low­ered the mon­e­tary pol­i­cy mech­a­nism from 17 per cent to 14 per cent.

On its web­site, the Cen­tral Bank de­scribes its pri­ma­ry or cash re­serve re­quire­ment as the prin­ci­pal di­rect mon­e­tary pol­i­cy in­stru­ment used by it to in­flu­ence mon­e­tary con­di­tions.

“By low­er­ing or in­creas­ing this frac­tion, the bank can in­crease or re­duce liq­uid­i­ty in the bank­ing sys­tem,” says the Cen­tral Bank.