- November 2024 VOLUME XXVI NUMBER 2
PORT- OF- SPAIN, Trinidad – The Central Bank of Trinidad and Tobago conducts monetary policy geared towards the promotion of low inflation and a stable foreign exchange market that is conducive to sustained growth in output and employment. This report provides an account of how monetary policy actions support this objective, in light of recent economic developments.
Key messages
- Effective July 24, 2024, the primary reserve requirement of commercial banks was lowered from 14 percent to 10 percent to bolster commercial bank liquidity.
- Daily average excess liquidity increased following the reduction in the reserve requirement, supporting continued robust growth in banking credit.
- The bank’s monetary policy stance remained broadly unchanged. At its September 2024 meeting, the Monetary Policy Committee (MPC) maintained the Repo rate at 3.50 percent – unchanged since March 2020.
- Domestically, the Central Statistical Office (CSO) data evidenced an expansion in real GDP in the first quarter of 2024. Indicators monitored by the central bank point to lower output in some sectors in the second quarter of 2024. Meanwhile, headline inflation remained very low, slowing further in October 2024.
- The International Monetary Fund (IMF) estimates global growth in 2024 will remain relatively unchanged from 2023 at 3.2 percent.
- In the third quarter of 2024, the United States (US) Federal Reserve (the Fed), Bank of England (BoE) and the European Central Bank (ECB) lowered their benchmark interest rates.
Preface
The Central Bank of Trinidad and Tobago’s monetary policy framework is guided by the objectives of maintaining low and stable inflation in an environment conducive to economic growth and financial system development. The central bank employs a range of instruments (direct and indirect) to effect monetary policy.
Prior to the 1990s, the central bank utilised direct policy tools such as reserve requirements and direct credit controls. However, the onset of trade and financial liberalisation in the 1990s brought about a greater emphasis on market-based instruments such as Open Market Operations. Since mid2002, the central bank’s monetary policy framework was revised to include the use of a Repurchase (‘Repo’) rate as a key policy tool. The Central Bank utilises the Repo rate to signal to the banking system the direction in which it wishes short-term interest rates, and ultimately, the structure of market interest rates, to move. Open Market Operations involve the purchase and sale of government securities by the Central Bank to impact the level of liquidity in the domestic financial system.
The Monetary Policy Committee (MPC) develops and communicates the central bank’s overall monetary policy stance. The MPC currently comprises members of the central bank’s senior management and is chaired by the Governor.
The Committee issues quarterly Monetary Policy Announcements (MPA), which provide insights into the MPC’s deliberations, and oversees the preparation of the semi-annual Monetary Policy Report (MPR). The MPC is assisted by the Monetary Policy Secretariat (MPS), made up of staff from various Departments, which undertakes ongoing analytical analysis of the financial and economic environments. The central bank utilises the MPR to communicate to the public its views on economic and financial developments and the main factors that influence the central bank’s monetary policy decisions.
Conclusion
Given the role served by banks and non-banks, this article aimed to explore the relationship between banking stability and real economic outcomes.
Impulse response functions revealed that banking stability, as measured by the BSI, was associated with favourable conditions, depicted by higher growth and employment levels. Further, higher price levels were also observed, which may not necessarily be deemed ‘favourable’, depending on the prevailing inflation dynamics.
Further investigation suggested that this relationship is driven by banking sector profitability and liquidity.
Sound management, evidenced by loan portfolio growth, also revealed positive implications for growth, although the impact to employment and inflation could be deemed insignificant. Whilst previous studies have questioned the validity of this relationship, recent structural changes in the economy warrant further investigation of this relationship. Meanwhile, growth conditions deteriorated on account of poor asset quality and heightened sensitivity to market risk. Shocks to the latter also yielded persistently negative responses from employment and price conditions. Notably, there was no observed impact to economic activity on account of capital adequacy.
Overall, the findings appear to highlight that a stable banking sector is a harbinger for favourable economic conditions. The Central Bank of Trinidad and Tobago, through its role as regulator and supervisor of the local banking system, has been actively seeking to promote banking stability by issuing numerous corporate governance and risk-based guidelines, including the transposing of the Basel supervisory frameworks into domestic banking laws. The findings underscore that both micro and macro prudential oversight are necessary to support and sustain positive real economic growth.
- Report NOVEMBER 2024 VOLUME XXVI NUMBER 2 – monetary-policy-report-november-2024
