Home' Trinidad and Tobago Guardian : June 19th 2014 Contents JUNE 2014 • WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
Chief editor-business: ANTHONY WILSON
Editing and design: NATASHA SAIDWAN
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Last week, in an article headlined "Is the era of
cheap money coming to an end?" it was predicted
that stronger inflationary impulses in the latter
half of 2014 would put pressure on the Central
Bank to increase the repo rate from its historic low
of 2.75 per cent later this year.
That prediction was partly based on analysis in the May
2014 Monetary Policy Report in which the Central Bank said
that record low interest rates in T&T---at least since September
2012 when the repo rate was reduced to 2.75 per cent---had
encouraged a rise in consumption, "as evidenced by robust
growth in consumer borrowing and sharp increases in sales
figures for high-priced durables such as motor vehicles.
"The faster pace of economic growth coupled with rising
consumption and the threat of higher international agricultural
prices, has the potential to stoke inflationary pressures over
the coming year."
Crucially, the Central Bank also said while it was committed
to providing the necessary support to the economic recovery
that is underway, it "will have to start giving greater weight
to managing inflationary expectations in its monetary policy
The Central Bank s shift in emphasis from attempting to
use interest rates to stimulate the economy to starting to give
"greater weight to managing inflationary expectations" is a
deliberate signal to the country that it should prepare for
higher interest rates.
Other central banks around the world are also signalling
that the era of cheap money could be coming to an end.
In a speech in London last Thursday, Bank of England Gov-
ernor Mark Carney said: "There s already great speculation
about the exact timing of the first rate hike and this decision
is becoming more balanced. It could happen sooner than mar-
kets currently expect."
Carney said the Bank of England s rate-setting committee
did not have a preset course and its ultimate decision on the
timing of the first rate increase "will be data driven" and based
on a host of labour market, capacity utilisation and pricing
While spare capacity and unit labour costs---in addition to
price increases---are important indicators for the Bank of Eng-
land, because of the continuing paucity and lack of timeliness
of much of T&T s data, the analytical options available to our
Central Bank are more limited. This increases the risk that
the timing and extent of the first rate hike could be miscon-
But the T&T Central Bank does have tools that, one suspects,
it is using to make the assessment of when and by how much
to increase interest rates. Among these tools---and they are
tightly linked---would be the pace of lending to consumers
and business, and the demand for foreign exchange.
With regard to the issue of lending by the financial sector
to consumers and corporates, the Central Bank said in its
Monetary Policy Announcement, which was released on May
29: "On a year-on-year basis, private-sector credit granted
by the consolidated financial system grew by almost six per
cent in March 2014, up from an increase of 2.5 per cent one
"Notably, as a sign of improving corporate activity, business
lending emerged from a year-long decline, posting growth of
a little over two per cent in February 2014 and increasing
further by close to 3.5 per cent in March 2014.
"Consumer loans maintained a relatively robust rate of
expansion, growing by nearly six per cent in March 2014.
Consumer lending was driven by motor vehicle loans and
loans for home renovations, while there was a pickup in out-
standing credit-card balances."
On the issue of demand for foreign exchange, it is clear that
as the pace of economic growth quickens, the demand for US
dollars will increase---as more consumers access lending from
In a speech on May 27 at the Tobago House of Assembly,
Central Bank Governor Jwala Rambarran noted the demand
for foreign exchange amounted to US$2.6 billion in 2003, but
increased to US$7 billion in 2013. (And it is interesting that
the pace of demand for foreign exchange is faster than the
growth of T&T s GDP, which in nominal terms jumped from
$67.7 billion in 2003 to $176.5 billion.)
Mr Rambarran also noted that while the supply of foreign
exchange increased in that same period, supply was being
outstripped by demand. He said the supply of foreign exchange
was US$2 billion in 2003 and that this had increased to US$5.8
billion in 2013.
The Central Bank has had to intervene with increasing vol-
umes of foreign exchange to bridge the gap between supply
and demand, by selling US$500 million to the banking system
in 2003 and US$1.7 billion in 2013.
As the economy grows and as demand for loans increases,
it is inevitable that the demand for foreign exchange will
In small, open, undiversified economies, increasing interest
rates may be used as a means of limiting the demand for
foreign exchange as much as dampening the pace of infla-
tion---as there are clear linkages among economic growth,
inflation and demand for foreign exchange.
Factors likely to increase
• As mentioned last week, the 2015 budget is likely to be
the last such exercise before the 2015 general elections and
there is going to be tremendous pressure on Minister of Finance
Larry Howai to produce a buy-election budget.
• There is a strong likelihood that the CL Financial matter
would be resolved before the buy-election budget in September.
If the resolution ensures that arrangements are in place to
satisfy all of CL Financial s outstanding creditors, there is likely
to be a significant improvement in the country s psycho-
financial well-being and in economic confidence.
Factors likely to mitigate
• Clico/CL Financial assets such as the 56 per cent of
Methanol Holdings and 52 per cent of Republic Bank are likely
to be sold in order to pay off CL Financial s creditors. Such
asset sales may create new opportunities for the local capital
market, both in terms of the issue of debt and equity offer-
• If the Phoenix Park and the TTMF/HMB IPOs are brought
to market before the end of the year, that is likely to lead to
the transfer of money that is being held in deposit accounts
and income funds into long-term investments.
When, and by how much,
will interest rates go up?
Central Bank Governor
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