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No need to raise rates here
Yesterday’s decision by the US Federal Reserve, that country’s central bank, to raise the target overnight interest rate by 0.25 per cent to a range of 0.75 per cent to 1.00 per cent may be an indication that the American economy is growing at a reasonable pace, with steady gains in employment and the prospect of higher inflation as a result of proposed tax cuts by the Trump administration.
The Federal Reserve introduced its regime of low interest rates in December 2008 in an attempt to stimulate lending, spending and investing in the US economy, in what it hoped would stave off the collapse of the financial system there following the full onslaught of the global financial crisis.
There is significant agreement in the US that low interest rates there have achieved their goal of normalising that economy. As well, yesterday’s hike in the interest rates was almost unanimously approved by the rate-setting committee of the Federal Reserve, predicted by most analysts and economists in the US and around the world and greeted by relatively muted reaction by the interest rate-sensitive stock, bond and money markets.
In short, raising interest rates at this time was quite appropriate for the American economy.
On the other hand, it would be a serious mistake for the Central Bank in Port-of-Spain to play trump and follow suit, to borrow a phrase from local card-playing language.
That is because the local economy, both onshore and offshore, is in steep decline, unemployment is trending up in both the energy and non-energy sectors and inflation remains—to quote last Friday’s Central Bank Economic Bulletin— “relatively contained” during the second quarter of the 2017 fiscal year “as a result of the dampening effects of the slowing economy, which outweighed inflationary pressure arising from select fiscal measures.”
The previous Central Bank Governor, Jwala Rambarran, hiked T&T’s repo rate on eight occassions between September 2014 and December 2015, taking that rate—which is meant to signal higher rates at commercial banks—from 2.75 to 4.75 per cent.
Mr Rambarran’s view was that “higher domestic interest rates are necessary to enhance returns on TT dollar-denominated assets” and “to discourage heavy consumer borrowing on imported consumer durable, which are a major source of foreign exchange demand.”
The belief that monetary policy alone—in the absence of strong coordination of fiscal, exchange rate and structural measures—can curb demand for foreign exchange in small, open, wealthy economy seemed unusual then.
The economic downturn—with unemployment heading up, some tweaking of consumption taxes and the reduction in the subsidy on fuels—along with the Central Bank’s rationing of foreign exchange, have been quite effective in limiting the drawdown in foreign reserves to levels with which the Central Bank appears to be comfortable.
In all the circumstances, therefore, the local Central Bank would be quite reckless to mimic the US Federal Reserve in pushing up interest rates here when the circumstances simply do not warrant such action.
Higher interest rates in T&T would further slow down an economy that is already in reverse while adding costs to businesspeople who are already overburdened by higher taxes and the increased cost of acquiring foreign exchange.
Not having been signalled in the way the US rate hike was, higher interest rates here may cause panic and unintended consequences in the local stock, bond and money markets.
Such financial trauma is not only unnecessary, it is unwarranted and unwelcomed.
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