Trinidad and Tobago's Reduced Reserve Requirement Will Increase Forex Demand

• Following the Central Bank of Trinidad and Tobago’s (CBTT) announcement of a reduction in reserve requirements for commercial banks to 10% from 14%, economist and former minister in the Ministry of Finance Mariano Browne said this could increase foreign exchange demands.
• The CBTT announced the reduction in a release on July 19 following a Monetary Policy Committee (MPC) meeting held the same day. The Committee noted that a lowering of the reserve requirement, accompanied by greater reliance on open market operations, would have an immediate impact on liquidity. These factors led to the reduction of the primary reserve requirement.
• "Since the effect of reducing the reserve requirement is potentially expansionary by increasing consumption, we can presume that the CBTT is attempting to expand demand and increase economic activity. The CBTT has stated that 2024 economic growth prospects were 'modestly' favourable. Perhaps this injection in disposable income is to help boost economic growth,' said Browne.
• However, Browne noted the real risk of expanding the economy is the risk of inflation and an increase in foreign exchange demand.
• 'This expansion is not likely to lead to moderate inflation. However, any expansion will increase the demand for foreign exchange, which is already in short supply. That is the real danger as foreign exchange reserves have continued to slide as energy import values and volumes have declined,' explained Browne. He added that this reduction suggests banks will have more money to lend.
• "Making more loans has a positive effect on consumer buying power. This means that banks can lend more and the loan funds are then spent or invested,' Browne said. He added that this reduction could also potentially increase consumption.

 (Sources: Trinidad Express Newspaper & CBTT)