Despite the Central Bank’s intervention in March to increase the money supply, businesses have been slow to take up any opportunity. The bank had lowered the repo rate to 3.5 per cent and reduced the reserve requirement to 14 per cent in response to the anticipated economic fallout of the covid19 pandemic and mitigation policies, including stay-at-home orders and restricted movement limited to essential activities.
In its monetary policy announcement for June, the bank said almost immediately commercial banks responded, cutting their prime lending rates (9.25 per cent to 7.5 per cent). Liquidity surged, with excess reserves at the Central Bank reaching over $10 billion in mid-June. But, the bank said, “There is little indication that there has yet been a significant pickup in private sector credit as businesses await a recovery in demand.”
Business credit, the bank said, declined by 5.7 per cent year-on-year in March, reflecting a pre-pandemic trend evident for several months. Based on historical experience, however, the impact of the monetary policy actions will take several months to fully filter into interest rates and credit, it added.
Economic activity in TT is gradually resuming, following several months of lockdown, the bank noted, but “not unexpectedly, earlier stay-at-home requirements resulted in a lull in activity in most sectors and a reduction in disposable incomes.”
Inflation rates remained near zero – 0.4 per cent year-on-year in March 2020. Despite the gloomy environment, the country’s international reserves position remained strong at US$6.8 billion on June 19 (around eight months of import cover), boosted by a recent US$400 million drawdown from the Heritage and Stabilisation Fund. Falling interest rates in the US meant an improvement in the TT-US rate differential to 81 basis points on three-month treasury bonds in June.
The international economic environment was also a cause for concern. The bank noted the International Monetary Fund recently revised its world economic outlook global growth rate down to 4.9 per cent. TT is projected to contract 4.5 per cent.
Global trade is expected to contract by 11.9 per cent. “While many countries are slowly reopening their economies, there is a rising threat of a second wave of covid19 infections and deaths as new hotspots emerge, including in neighbouring Latin American countries. As a result, stock markets have oscillated.”
The macroeconomic policy environment across the globe can best be described as intense and uncertain, the bank said, constrained for the most part by the fiscal space available to governments. Central banks have adopted an accommodative approach, lowering interest rates, increasing asset purchases, and providing liquidity support – much like TT’s.
In light of all this, in particular the substantial liquidity in the domestic system and the expectation that the March 2020 monetary policy actions will have a stronger effect on credit as the domestic economy opens up, the bank has maintained a repo rate of 3.5 per cent. The next monetary policy announcement is scheduled for September 25.