Central Bank cuts reserve requirement by 4%

THE Central Bank of TT (CBTT) has reduced the reserve requirement for commercial banks from 14 per cent to 10 per cent.

This takes effect from the reserve week beginning July 24, the bank said in a news release on July 19.

It said the Monetary Policy Committee (MPC) at a special meeting on July 19 examined the recent decline in excess reserves of commercial banks – deposits held by banks at the CBTT in excess of the required reserve ratio of 14 per cent of prescribed liabilities (deposits and short term borrowings).

The daily average of commercial banks’ excess reserves measured $2.7 billion from July 1 to July 18, 2024 compared to $3.9 billion in June 2024.

In its most recent monetary policy announcement on June 28 the CBTT said excess reserves at the CBTT averaged $4.2 billion in the first half of June 2024, marginally lower than in May 2024 ($4.3 billion).

It said 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 CBTT to affect liquidity), would have an immediate impact on liquidity.

"This combination is also consistent with the CBTT's long-standing objective of progressively moving towards more market-determined instruments of monetary policy," it stated.

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.

In June CBTT said that global economic conditions remain relatively stable.

The International Monetary Fund has stated that world growth for 2024 is forecast at 3.2 per cent, unchanged from the 2023 estimate.

Most central banks have either held their policy rates stable or lowered their rates as inflation pressures have eased, the CBTT said.

In June 2024, the United States (US) Federal Reserve (Fed) maintained its federal funds target range of 5.25 per cent to 5.50 per cent, while the European Central Bank cut its policy rate by 25 basis points to 4.25 per cent after a nine-month pause. At the same time, the long period of high interest rates has contributed to a meaningful increase in debt service obligations in many countries.

Financial sector liquidity remained ample during the second quarter of 2024, in the face of an increase in domestic financing by the Government.

There was nonetheless some skewness in the liquidity positions of banks, leading some institutions to temporarily borrow on the interbank market. Private sector credit performed favourably, growing by 6.7 per cent (year-on-year) in April 2024 compared with 7.9 per cent in January 2024, the report said.

CBTT said, "In its assessment of external economic conditions, the MPC took note of the relative steadiness of global inflation, the likely easing of monetary policy rates, and the geopolitical uncertainties that are clouding the international growth outlook. Domestically, the low level of inflation and buoyancy of credit were supportive of the ongoing economic recovery, although the negative interest rate differential warranted close monitoring given its potential impact on the country’s external balance."

The MPC has agreed to maintain the repo rate at 3.50 per cent.

The CBTT said it will continue to carefully examine and analyse international and domestic developments and prospects.

The next monetary policy announcement the bank said will be released on September 27.