Central Bank POS

The Monetary Policy Committee (MPC) of the Central Bank of Trinidad and Tobago has announced a reduction in the Repo rate as it tries to support the economy hit by the free-fall of energy prices and the loss of production expected as the impact of measures to combat the COVID-19 is felt in T&T.

The reduction in the Repo rate by 150 basis points will make it cheaper for banks to borrow and cold assist it in reducing interest rates to its customers.

According to a release from the CBTT: ” The MPC decided to reduce the repo rate by 150 basis points to 3.5 per cent and to lower the primary reserve requirement on commercial bank deposits by 3 per cent to 14 per cent. The MPC considered that such actions would amplify system liquidity in the short run—approximately $2.6 billion in the case of the lower reserve requirement—and allow for a reduction in interest rate spreads by lowering commercial banks’ cost of funds.”

The Bank said it held a special sitting on March 17, 2020 as it looked at the globally impact of the Covid-19 virus on lives and economies.

According to the Bank the coronavirus outbreak has already upturned financial markets, created supply chain disruptions, driven energy prices to very low levels and led to the increasing self-isolation of several countries. A compounding factor the CBTT noted is the tremendous uncertainty regarding the path of future infections, the timing of the turning point, and the extent of the ripple effects.

“In response, many central banks have already lowered their policy rates, expanded quantitative easing, and added new financing programs in an effort to stimulate economic activity at a time when many businesses have been forced to cease operations.” the CBTT press release read.

It noted that one significant fallout of the pandemic has been the dramatic drop in energy prices as the demand for fuel declined on account of the slowdown of industrial production and sharp reduction in airline carriage. This coupled with discord among the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries has resulted in the West Texas Intermediate (WTI) oil price hovering around the US$30 price point in March 2020 compared to US$50-US$60 earlier in the year.

It said as an energy exporter, Trinidad and Tobago is feeling the effects of both shocks.

The report read: “The impacts on the fiscal and external balances will likely spill over to the growth outlook depending on the duration of the events. At the same time, inflation remains quite low, at 0.4 per cent (year-onyear) in January 2020. While overall private sector credit from the financial system grew by 4.6 per cent in January, the business lending category continued to slip. Excess liquidity in the banking system in mid-March was $4.8 billion. Falling interest rates in the US market resulted in an improvement of the TT-US differential, with the differential turning positive in March 2020 at all tenors”.

It ended that taking these factors into account, the MPC also considered that the unprecedented nature and magnitude of the pandemic, exacerbated by the energy price drop, highlighted the underlying need for coordinated monetary, fiscal and structural policies.