Mopping up the liquidity

Central Money Market Brokers (CMMB) managing director Robert Mayers said there were many sides to the issue of excess financial liquidity in TT and blamed Government’s fiscal policies for the current scenario.

Mayers claimed that while the Central Bank has been trying to use open market policies and increasing the repo rate to deal with liquidity, the reality is that these measures are not working because the market is not responding.

Expressing doubt that the measures now being introduced by the Central Bank would mop up excess financial liquidity in the system, Mayers suggested that Government consider pegging the TT dollar to either the Euro or a basket of foreign currencies, as opposed to the US dollar.

Claiming that TT’s dollar was connected to the US currency on a "dirty float," Mayers said he believed that this situation could place the national economy at risk given the trends in the US dollar against other international currencies over the last two years.

Mayers added that while the verdict is out on whether the measures now in train would deal with excess financial liquidity in TT, the question that was on everyone’s mind was whether the relevant authorities had "the will" to address this situation. Central Bank Governor Ewart Williams cited TT’s flexible exchange rate and a stronger banking system as being able to cope with the excess liquidity.

Williams said while the nation’s financial system still faces challenges, it is better able to handle situations such as sudden changes in international energy prices and doused fears of a repeat of the post-1970’s economic fallout.

The Central Bank has said the high levels of liquidity arose partly from increased public sector spending and the receipt of foreign loans to finance domestic expenditures, contributing to an exceptionally high level of special deposits at the Bank. Despite maintaining the repo rate at six percent, the Central Bank said this was not being effectively transmitted to the general level of interest rates because of the existence of excess liquidity.

The Bank’s measures included lowering the rate on special deposits held by commercial banks at the Central Bank from 2.5 to zero percent, effective December 28, 2005. Commercial banks are also being required to place in aggregate $1 billion in an interest-bearing account at the Central Bank for a minimum period of one year.

The Bank added that along with these measures, the repo rate would be maintained at its current level of six percent and monetary conditions "would be kept under close review." The next Central Bank repo rate announcement, the first for 2006, is scheduled for January 20.

Minister in the Ministry of Finance, Conrad Enill said, he was confident of the measures being employed by the Central Bank to deal with excess financial liquidity. Describing these as "aggressive monetary policy," Enill said higher repo rates, increased treasury bills and the requirement of commercial banks to lodge an aggregate of $1 billion at the Central Bank would serve their stated objectives to mop up excess financial liquidity.

"The Central Bank therefore has been proactive in sterilising these increases in the banking system in light of inflationary trends. The Government is working to assiduously cap inflation," the minister stated.

He also disclosed that Government would give consideration to increased treasury bills and treasury notes issue limits as other measures which could be used to deal with excess financial liquidity. Enill gave the assurance that Government would continue to ensure that the economy does not deviate too far from its potential growth path.

Republic Bank Securities boss Ian Narine said he believes that the steps being implemented by the Central Bank are in the right direction.

Narine explained that for too long, the repo rate was used as the only instrument to deal with issues of financial liquidity. He expressed confidence that the measures implemented by the Bank, working in tandem with the repo rate would mop up any excess liquidity.

Narine said at the end of the day, the authorities have to look at "all avenues" that will address the problem. He suggested that one measure which could be explored is increasing the flexibility of the exchange rate which has been something of a managed float since 1994. Narine said perhaps the time had come to remove the "psychological benchmarks" where this issue is concerned but he was in no way advocating an appreciation or depreciation of the TT dollar. He added that there will always be an element of risk in managing financial issues and the measures taken must ensure that the "end justifies the means."

Scotia Bank CEO Richard Young has said the Central Bank’s move was a good one and one which all of TT’s commercial banks are committed to working towards. Young said the $1 billion which each commercial bank will be depositing into the fund established by the Central Bank will be in ratio to their primary reserves.

"We’re all concerned about rapid inflation and excess liquidity. This is an industry thing we have to do. I don’t think that anyone wants to see inflation carried away like this," he stated.