Watch out for higher interest rates, says analyst

Published: Tuesday October 28, 2008

General manager of Caribbean Money Market Brokers Securities and Asset Management Limited (CMMB), Brent Salvary, said yesterday that the Central Bank of T&T’s recent attempt to absorb excess liquidity in the local economy will not neutralise the effects of government spending.

Salvary made the comment in an interview with the T&T Guardian at his office at CMMB, Richmond Street, Port of Spain.

He was commenting on last Friday’s “Repo” rate announcement by the Central Bank in which the bank increased the reserves which commercial banks are required to hold at the Central Bank from 15 per cent to 17 per cent of prescribed liabilities with effect from November 5.

In making the announcement, the Central Bank said that the country’s inflation rate rose to 14.8 per cent at the end of September, up from 13.5 per cent at the end of August.

Salvary said that net fiscal injections into the domestic economy needed to be curbed in order to reduce the level of inflation.

He added that Friday’s Central Bank action to tighten monetary policy should see further increases in the prime lending rate.

“Basically what the Central Bank is trying to do, they are using one of their tools from their monetary policy kit to control inflation and we have seen the last inflation numbers coming out at 14.8 per cent.

“This is Central Bank’s reaction to trying to curb that (inflation). Of course, one of the big problems is that one of the drivers of inflation in the local economy is government (spending) and this would not affect their spending,” Salvary said.

“What this move is intended to have an impact on is credit, since banks would have less funds to lend, given that the reserve requirement has been increased from 15 per cent to 17 per cent.

“Credit expansion, which has been very significant over the past three to four years would probably tend to be lower.

“It will affect the consumer and companies. Basically what they will have is an increase in interest rates, in borrowing rates, because since you are raising the reserve requirement, banks would lend less, therefore what you do is create a shortage of dollars to be lent and therefore increase the cost of borrowing,” Salvary said.

“I mean it (the prime lending rate) has been increased several times over the last couple of months and it probably might increase.

“The prime lending rate is probably one of the things that you have to look out for as a result of this, although, prime has been increasing over the past few months. “But generally it should increase interest rates to discourage people from borrowing and limit the amount of demand that we have seen in some parts that has driven up prices and inflation as a result.”

Salvary added that the Central Bank action was “intended to save the economy.”

He said, “What you want to do, you want to control inflation, you want to control price increases which have gone through the roof.


Source: Trinidad Guardian Newspapers
http://www.guardian.co.tt/business1.html