Dec 2005 Financial News

New measures to fight liquidity

Dec 23, 2005

Having failed to curb excess liquidity in the economy by hiking the repo rate, the Central Bank yesterday took two new measures to deal with the problem which contributes to higher inflation.

It’s first course of action is to require the six commercial banks to place a total of $1 billion in a deposit account bearing 4.5 per cent interest at the Central Bank for one year.

Secondly, the Central Bank announced that the rate on special deposits held by commercial banks at the Central Bank, which was lowered from 3.50 to 2.50 per cent as of September 1, has been further reduced. The new rate is now zero per cent with effect from December 28.

Commenting on the Central Bank’s measures, Governor Ewart Williams said increases in the repo rate have not been having the desired impact.

He said the reduction in special deposits provides a disincentive for commercial banks to “park money” in the Central Bank, and is conversely an incentive for commercial banks to participate in T-bill auctions, which is 5.01 per cent.

Even as the Central Bank stated yesterday that the repo rate will remain unchanged at 6.0 per cent, it also said that headline inflation, measured by the 12-month increase in the index of retail prices, rose to 7.03 per cent in November.

The Bank said the high liquidity, arising in part from increased public sector spending, is a major contributor to the current inflationary environment.

On Tuesday, the Urban Development Company of T&T (Udecott) secured a US$136 million (TT$855,440,000) from FirstCaribbean International Banking and Financial Corporation Ltd.

Scotiabank CEO Richard Young said the Central Bank’s move was a good one, to which all the commercial banks are committed to working towards.

He said the sum each commercial bank will be depositing towards the $1 billion will be in ration to their existing primary reserves.

“We’re all concerned about rapid inflation and excess liquidity,” Young said. “This is an industry thing we got to do. I don’t think anyone wants to see inflation carried away like this.”


The Trinidad Guardian
Friday, 23rd December, 2005.
http://www.guardian.co.tt/business1.html