T&T’s Central Bank Chief Indicates Interest Rate Hike to Address Foreign Exchange Challenges

• The newly appointed governor of the Central Bank of Trinidad and Tobago (CBTT), Larry Howai, has noted that the interest rate “will have to go up,” suggesting that ongoing negative interest-rate differentials with the U.S. discourage the repatriation of earnings to Trinidad and Tobago, exacerbating ongoing foreign exchange (FX) shortages on the island.
• While he did not specify the magnitude or timing of the increase, Fitch Solutions anticipates that the CBTT will raise the policy rate to approximately 5.50%-6.00% through 2026 as the U.S. Fed begins its easing cycle towards 3.50% over the same period. Historically, the policy rate differential averaged just under 250bps from 2010 to 2025, and Fitch anticipates a return to this stance.
• Howai outlined several possible non-monetary initiatives to address imbalances in the FX market, including tighter FX management, credit controls on consumer lending to reduce domestic consumption, and constraints on liquidity, many of which would likely require legislative approval.
• While Governor Howai suggested unequivocally that the central bank would adjust the policy rate to counter capital outflows and stabilise the domestic foreign-exchange market, he emphasised that this was merely an introductory discussion. That said, his announcement marks a notable shift in a monetary policy stance that has remained rigid in the face of inflation, with the policy rate held steady at 3.50% since March 2020.
• Trinidad and Tobago (T&T) maintains a de facto peg^[1] of its local currency against the US dollar (USD), leveraging large foreign-exchange interventions in the domestic market to stabilise the rate and reduce imported inflation. Despite reports that the T&T dollar is overvalued at the current pegged rate of TTD6.77 per USD, Howai asserted that changes to its exchange-rate regime were outside the bank’s mandate and would be left to elected policymakers, with the CBTT instead providing data and analytics to policymakers to assist their decision-making.
• However, the government has rejected calls to devalue the currency, with Finance Minister Davendranath Tancoo insisting that any devaluation of the TTD would threaten inflation and stifle economic activity, especially in industries which use imported goods.

(Source: BMI, A Fitch Solutions Company)

 

 

^[1] A de facto peg refers to a situation where a country's exchange rate is not officially fixed (pegged) to another currency, but in practice, it behaves as if it is.