In many countries, during an economic downturn a combination of fiscal and monetary policy is employed to stimulate that economy into a state of recovery and/or stability.
Fiscal policy can be described as tools (adjustments in spending levels and tax rates) used by the government to influence the country’s economy. Monetary policy is a framework of economic tools (managing money supply and interest rates) used by the Central Bank. What is being done to stimulate the economy of T&T to create an environment of economic growth and prosperity?
T&T is a small island economy that depends heavily on the government spending.
In fact, a sizeable portion of the local business sector can be regarded as a “contractor class” rather than a “business class.”
Government has been conducting a determined exercise in cost cutting to bring its spending in line with lowered revenue projections. During the recent national budget debate the Minister of Finance boasted of a one per cent inflation rate.
According to Central Bank statistics, the inflation rate in T&T averaged 7.22 per cent from 1957 to 2018 and approximately five per cent in the last five years. A one per cent inflation rate is symptomatic of a stagnant economy and cries out for corrective monetary policy. In the wake of the most catastrophic financial crisis in the last 100 years what did the American FED (Federal Reserve/Central Bank) do?
The Fed used extraordinary measures, such as pumping liquidity into the banking system, slashing interest rates to zero and buying Treasury and mortgage securities in a “quantitative easing” programme that ballooned its balance sheet to a high of $4.5 trillion.
This programme pumped cheap money into the American economy while making the US Fed the largest hedge fund on the planet. The banks used this cheap money to offer low interest rate loans to consumers and corporations alike that were enticed by the lower cost of borrowing and took out loans for; investment, refinancing, and consumption.
This programme was implemented in 2009 and has been credited for the current booming US economy, regardless of what politicians say about two-year tax cuts.
The current US economy, for the most part, is the product of a monetary policy implemented by the US Fed in the wake of the 2008 financial crisis. The US banks offered cheap loans to consumers in a successful effort to get them spending and the economy moving.
In 2016, the Minister of Finance, Colm Imbert, bitterly complained in the Parliament about bank rates and swore to look into the issue of deposit and saving rates charged by domestic banks. Minister Imbert said he had the authority to act on the issue by law and was “shocked” it was not a matter dealt with before.
“As far as I know, no previous Minister of Finance ever looked at this. Never looked at the fact that the Central Bank and the Minister of Finance can regulate the spread between deposit rates and lending rates and the fees and charges charged by... so that it’s in the law and I can tell you I have asked the Central Bank to start to initiate discussions with the banks on this.”
He continued “because this is like a culture shock, eh, to the banks, that someone would come to them and say we are going to invoke Section 44A of the Central Bank Act.”
Section 44A of the Central Bank Act states:
(1) The Bank (Central Bank) may fix the maximum and minimum interest rates payable on deposits received, and may fix the maximum and minimum interest rates, fees and charges to be charged on loans, advances or other credit facilities, by a financial institution.
(2) The bank, after consultation with the minister, may set the maximum spread between interest rates chargeable on loans and interest rates payable on deposits, which a financial institution may earn, carry or charge.
The difference between the rate paid on deposits and the rate earned on loans is called the spread. According to the Central Bank’s economic bulletin (March 2018), the gap between deposit and loan rates was 7.58 per cent.
According to the World Bank website the average global spread on loans and deposits in 2017 averaged 5.74 per cent.
With government currently the majority owner of the two largest domestic retail banks in T&T should change be expected around the corner?
In the context that government recently raised corporate tax rates on financial institutions to 35 per cent and included $4 billion of Republic Bank shares as the cornerstone in the largest local bond issue, everyone shouldn’t bank on it.