The Governor’s room

The Central Bank Act states that “The Bank shall have as its purpose the promotion of such monetary credit and exchange conditions as are most favourable to the development of the economy of Trinidad and Tobago.” This means that at the end of the day the Central Bank, in particular the Governor, has to determine the most appropriate course of action to adopt.

There are those who may argue that at a time when the economy is experiencing negative growth the Governor should consider the need to get growth started as the highest priority. Certainly, at this time stabilizing the economy and re-igniting growth is important, but so too are risks associated with not responding to the Fed’s decision.

The Governor has a choice to either consider the need to ensure cost of borrowing remains low or provide the incentive to borrow by not raising the repo rate or he can consider the narrowing TT-US differential a higher risk to the economy.

An examination of the threemonth TT-US differential and the long-term differential (10-year Treasury differential) suggests that the Governor does have the room to hold-off on increasing the repo rate. Perhaps if the Fed were to increase the rate again then the Governor may have to look at portfolio realignment and adjust the differential to remove the incentive for local institutions and individuals to look for higher yields abroad. We will have to wait and see what is the Governor’s interpretation of the risk faced by the narrowing TT-US differential.

Of course, one may ask, what about this policy of forward guidance? Generally a Governor takes a philosophical position with regards to communicating with the nation. Governor Ewart Williams took a position that was diametrically opposed to that used by Alan Greenspan. The latter held the position that if the audience understood what he was saying he had not achieved his objective.

Williams took great pains, not only to speak to the public but through the many publications of the Central Bank, he tried to inform as well as educate. He wanted the public to understand and participate.

The last two Governors appear to have taken, certainly in the early periods in office, a much less involved relationship with the public. As such the effectiveness of forward guidance is reduced. Especially at this time, understanding the risks facing the country and the role of monetary policy can be helpful if only to calm speculations based on ignorance.

Keeping the speculative motive in check can reduce the outflow of foreign currency once forward guidance telegraphs both the risks being faced and the policy stance that will be adopted. Certainly that may be an appropriate response to the present Fed’s action and anticipated actions in the future