ON JULY 19, the Central Bank’s Monetary Policy Committee held what it described as “a special meeting.”
What precipitated this, what views were aired and even who attended are not generally known; such proceedings are not usually public.
It is understood the committee comprises governor Dr Alvin Hilaire, a deputy governor and three others.
Those gathered decided to cut the savings requirement for banks from 14 to ten per cent.
This appears to be the first notable cut in the primary reserve, outside of covid19 pandemic measures, in almost two decades.
Questions arise. The timing suggests officials felt the measure was immediately merited.
Without fail over the past five years, the bank has released a calendar for its monetary policy announcements, and they have been due in March, June, September and December. Though no calendar was released for 2024, up until this month notices had been in accordance with the usual.
Something could not wait until September.
The announcement’s wording, too, has given rise to contradictory impressions.
In addition to saying the meeting was special, the bank said it had examined “the recent decline” in excess reserves of commercial banks from $3.9 billion in June to $2.7 billion in July.
At the same time, it suggested its reduction was oriented towards long-term factors, being “consistent with the Central Bank’s longstanding objective” of moving towards market-determined instruments.
Did the bank seize an opportunity?
Was the situation shifting already at the time of the last June announcement, when it said there was “skewness” leading to interbank borrowing?
Did any of this rise to a level meriting special action?
Former deputy governor Terrence Farrell has described the move as “strange” and “perplexing,” questioning whether it related to government borrowing. Oropouche West MP Davendranath Tancoo has asked if the Cabinet plans mega-projects.
Minister of Finance Colm Imbert, meanwhile, has pushed against reports of high levels of public debt and has noted Central Bank policy reports touch all primary market issuances, including non-government-guaranteed debt and corporates.
Reserve cuts – which regulate how much banks keep off-market and, thus, how much is free for spending – are not unprecedented and are often necessary, even amid demand pressures on foreign exchange.
In addition to the emergency reduction from 17 to 14 per cent in 2020, cuts occurred in 2004, 2003, 2001, 1998, 1987 and 1986. While they can fan inflation and unsustainable debt, they allow economic stimulation.
The reserve is a tool. As noted by researchers Yannick Melville and Nikkita Persad in a recent Central Bank paper which might give us some insight into the bank’s thinking, “when to deploy it depends on country-specific circumstances as well as how the policymaker views the build-up of vulnerabilities.” It is not one-size-fits-all.
Banks face penalties for failure to adhere to requirements, and such penalties could also have worrisome ripple effects.
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