Jan 2006 Financial News

Barbados, T&T using interest rates to tackle problems of excess spending, liquidity

Jan 05, 2006

TWO of the Caribbean's leading economies are using interest rates to lick two diverse problems.

For most of 2005 the Central Bank of Barbados has been adjusting interest rates to curb excess spending and protect the country's balance of payments, which continue to incur a deficit on the current account.

The Bank anticipates that the measures would have started to bear fruit in the last quarter of 2005 and be fully dealt with in 2006.

Notwithstanding these problems, the economy has registered growth in 2005.

Trinidad and Tobago, which continues to record growth rates in excess of six per cent, is battling excess liquidity in the system. Last week the Trinidad Guardian reported that having failed to curb excess liquidity in the economy by hiking the repo rate, the Trinidad and Tobago Central Bank took two new measures to deal with the problem which contributes to higher inflation.

It's first course of action was 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, the Guardian reported.

Secondly, the T&T 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 was quoted by the paper as saying that increases in the repo rate have not been having the desired impact. According to the Guardian newspaper, Williams 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 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. For Barbados, economic growth has been led by the foreign exchange using sectors wholesale and retail and construction. Imports have been on the rise and this has influenced the defensive measures.

At the start of 2005 the minimum rate on deposits was 2.25 per cent. That rate was subsequently increased to 2.50 per cent, then 3.75 per cent and from the beginning of November, 4.25 per cent.

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 have to do. I don't think anyone wants to see inflation carried away like this."

Both investors and businessmen will be watching developments in both countries in this new year.


The Barbados Advocate
Tuesday, 3rd January, 2006.
http://www.barbadosadvocate.com/NewViewNewsleft.cfm?Record=23807