Home' Trinidad and Tobago Guardian : August 2nd 2015 Contents AUGUST 02 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
COMMENTARY | SBG3
From what I have learnt in
nearly 25 years as a financial
journalist, central bankers
adjust interest rates in an
economy in order to stimu-
late economic growth---in
which case interest rates would be
reduced---or to reduce the rate of inflation,
which would lead a rational central bank
to increase interest rates.
The theory is that reducing interest rates
would stimulate an economy because if the
cost of money is lowered, all things being
equal, economic actors are more likely to bor-
row money from lending institutions in order
to fund new infrastructural projects, the acqui-
sition of houses, cars and consumer durables.
In a small, open economy that is dependent
on mineral resources, construction has a ten-
dency to stimulate the economy because it
requires the employment of labour and the
deployment of capital.
On the other hand, central banks
increase interest rates if an economy is
growing too quickly and there is a danger
that inflation and inflationary expectations
will begin to increase or have increased.
This is based on the assumption that the
higher the cost of money, the less likely
people would be to borrow money from
So, what should the fact that the Central
Bank has raised the Repo rate on six occa-
sions since September 2014 signal to the
population of T&T?
The theory would indicate that the
economy is growing at a very robust rate
and that the Central Bank is fearful that
the rate of inflation or inflationary expec-
tations are getting out of hand.
But does the evidence support the con-
tention that the T&T economy is growing
at a very robust pace and that there is
legitimate concern of inflation?
On Friday evening, the Central Bank
announced that its Monetary Policy Com-
mittee (MPC) had agreed to raise the
Repo rate for a sixth consecutive time by
25 basis points to 4.25 per cent. The Repo
rate was 2.75 in August last year.
According to the statement, the MPC
based its decision on three factors:
• The first and most influential factor
was recent forward guidance by the US
Federal Reserve on the start of normalisa-
tion of US monetary policy
• The second factor was the potential
for domestic core inflationary pressures to
pick up over the next few months
• The third factor upon which the MPC
deliberated was weaker-than-anticipated
growth in the non-energy sector in the
first half of 2015
Is the Central Bank right to be con-
cerned that the economy is in danger of
overheating or that inflation would pick up
in the near future?
According to the Central Bank s own
statement, growth in the non-energy sec-
tor was weaker than anticipated in the
first half of 2015 (See point 3 above).
On the issue of growth in 2015, the
Central Bank s Monetary Policy Announce-
ment goes on to state: "Despite slower-
than-expected-growth in the non-energy
sector in the first half of 2015, the MPC
anticipates a respectable performance in
the non-energy sector in the second half
The Central Bank bases this anticipation
of growth during the second half of the
fiscal year, which ends on September 30,
on the following:
It is not at all certain that increased
public spending, along with higher public
sector wages and the disbursement of
backpay to public servants, teachers, Uni-
versity of the West Indies workers and
others will lead to stronger growth in the
It could very well be that much of the
backpay and higher public sector wages go
to investments in the Phoenix Park IPO
and into deposit accounts rather than
being spent on new cars and on new 56-
inch flat screen televisions.
In other words, while there may be a
likelihood that the existing economic fac-
tors---election spending and election back-
pay---could lead to higher inflation, there is
no certainty that it will.
In fact, the timing of the 2015 general
election for September 7 may have con-
tributed to a slowdown in the velocity of
money throughout the economy during
the last half of the fiscal year as people sit
on their cash and wait for political, and
therefore economic, certainty.
In order to justify increasing the Repo
rate on six occasions since September last
year, the Central Bank must have been
worried that the rate of inflation was get-
ting out control.
On the contrary, the evidence may indi-
cate that inflation is moderating.
The basis of the September 2014
increase in interest rates was the following:
"Headline inflation accelerated in August
2014. A sharp uptick in food prices pushed
headline inflation up to 7.5 per cent in
August 2014 from 3.0 per cent in June
At the end of January 2015, when the
Repo rate was hiked to 3.5 per cent, the
Central Bank reported: "Headline inflation
is creeping up, reaching 8.5 per cent in
December 2014 from the 5½ per cent at
the start of the year. The pickup in head-
line inflation is mainly due to food price
inflation, which remained in double-digit
territory (almost 17 per cent) for the sixth
successive month in December 2014."
But at the March meeting, when the rate
was raised to 3.75 per cent, the Central
Bank said: "...even though headline infla-
tion slowed for the third consecutive
month in February 2015 to just over 6 per
cent from 9 per cent in November 2014.
And at its July meeting on Friday, the
Central Bank said: "Headline inflation held
steady at just over 5.5 per cent in June
2015, while core inflation slowed marginal-
ly to just below 2 per cent."
At best, therefore, the recent inflation
picture is cloudy and at worst the trend is
for declining inflation.
But, clearly, the Central Bank expects
inflationary pressures to pick up in the
remaining months of 2015 due to a num-
ber of factors, including:
"Food inflation accelerated for the first
time in 2015 spurred by rising input costs
(specifically poultry) and falling supply
associated with the outbreak of a pest in
the Dominican Republic, a major source
market for fruits and vegetables. In June
2015, food inflation rose to 9.7 per cent.
The advent of the rainy season raises the
possibility of flooding and may lead to
disruptions to domestic agricultural supply,
further pushing up food inflation, which
drives headline inflation."
So, is the Central Bank raising interest
rates because of pests in the Dominican
Republic and the possibility that flooding
may increase local vegetable prices?
It is also noteworthy that in September
2014, when the Central Bank started its
tightening cycle, excess liquidity levels
were around $7 billion, while on Friday,
the Central Bank stated: "With liquidity
levels falling to a daily average of $3.2 bil-
lion over the past three months (May --
July 2015), the MPC agreed to continue
with an aggressive programme to absorb
excess liquidity and strengthen the impact
of higher interest rates throughout the
In other words, the system is much less
liquid now than it was in September 2014,
when the Central Bank started tightening.
It seems to me that higher interest rates
are not meant to address the issue of
inflation or growth, but the possibility of
As the Central Bank said on Friday:
"Over the past few months, improving US
economic conditions and rising expecta-
tions for a Fed rate increase have led to
increasing yields on the benchmark 10-
year US Treasury.
"As a result, the interest rate differential
between TT -- US 10- year Treasuries nar-
rowed substantially to 69 basis points at
the end of July 2015 from 82 basis points
at the end of May 2015. Higher domestic
rates are necessary to enhance yields of
TT$ instruments to mitigate potential cap-
It strikes me that higher interest rates
are a blunt instrument when what is
needed is a scalpel to deal with "potential
capital outflows." This is because there is
significant time lag between the imple-
mentation of an interest rate movement
and its impact on an economy. That lag-
time may be as much as two years in
Also some of the people who are engag-
ing in "potential capital outflows" are less-
interested in return on capital as they are
in return of capital.
The issue of "potential capital outflows"
is largely due to the problems that busi-
nessmen have been experiencing in sourc-
ing foreign exchange for the last two years.
Many economists argue that T&T s foreign
exchange problem is directly linked to the
Central Bank s failed attempt to tamper
with the system of foreign exchange allo-
cation two years ago.
And, as the Governor well knows, in
T&T the demand for something is more
often than not linked to the price of it.
Foreign exchange is a prime example.
Finally, does it worry the Governor that
no other central bank in the entire world
has raised its policy interest rate on six
occasions in the last ten months?
Are we that unique?
Is Jwala wrong on inflation
and interest rates?
Does it worry the Governor that no other central bank in the entire
world has raised its policy interest rate on six occasions in the last
Are we that unique?
Central Bank Governor Jwala Rambarran
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