As it relates to inflation, the United States Federal Reserve has increased its interest rates ceiling from 1% to 1.75% today in a bid to tackle the country’s highest inflation rate in 40 years. We asked Minister Coye how this could affect Belize.
Christopher Coye, Minister of State, Ministry of Finance: “It seems reasonably clear that there is a slow down and it is in effect a policy engineered slowdown as far as what the if you follow US monetary policy the Fed has a dual mandate, the US Fed has a dual mandate to achieve the maximum rate of employment and at the same time maintain low inflation that’s inflation around 2% thereabouts and employment at the natural rate of unemployment which would be in their case around 5% so that’s in effect their goal and what is the current situation right now ? You have unemployment around 3.6% whereas their inflation rate the last figure was 9.1% so there’s a mismatch as far as what their targeting is. So they are making adjustments and the primary adjustment that they have to make or they see as the tool through which they can impact on inflation is by impacting on interest rates so that’s why you’d see that they have been pushing up the Fed funds rate and I think the last increase was three-quarter percent and it’s very likely that they’ll try and increase another three-quarter percent in the next couple weeks. So that activity if interest rates are going up then the cost of doing business is going up so then businesses will not borrow as much and not invest as much which means the economy will slow down and as it slows down then that means demand comes down which means inflation ultimately starts to flatten back. So that’s the effort there.”
According to Minister Coye, the government is ensuring that the Central’s Bank foreign reserve is at an adequate level.
Christopher Coye, Minister of State, Ministry of Finance: “We are not a floating rate system like the US so we don’t have forward guidance or forward policy guidance like the US that does inflation targeting like I just mentioned. So we are a fixed exchange rate jurisdiction which means we have to focus on maintaining that fixed exchange rate which means that we have to maintain foreign reserves that is our primary policy position that we have to be focusing on. We are doing excellently on that. We’re at the highest levels in history both at the levels of the Central Bank reserves as well as the domestic banks foreign exchange holdings. I think in total we’re over $1.6 Belize dollars the US dollar equivalent being $800 million US in US dollar holdings.”
Reporter: So for how many months ?
Christopher Coye, Minister of State, Ministry of Finance: “I think that translates to almost five months of imports.”
Minister Coye also spoke on treasury securities and the importance of amending the process of how securities are issued.
Christopher Coye, Minister of State, Ministry of Finance: “The treasury securities, the yield on treasury securities for the most part largely arbitrarily determined. It wasn’t market driven and if you look at our CD rates amongst all the banks the actual CD rates in the banking system were lower than the rates on treasury securities that’s back way, that makes no sense whatsoever. That enables the banks to have arbitrage because what is the lowest risk and you could go to any economics book and look it up, what is the lowest risk in domestic currency ? The lowest risk is government risk because in reality government could print the money to pay it’s debt. So the banks that’s a private business and that’s why you have the Central Bank to backstop them as the lender of last resort so that if they fail the Central Bank can bail them out. Who backstops the Central Bank ? It’s the government so government has the lowest risk in the system yet the yield on treasury securities are above what is in the private sector in the banking system so that doesn’t make any sense so that is where I have spoken about active yield curve management to make sure that we are aligned with how the market should actually be operating. So that is where we have been bringing down the the interest rates on treasury securities which is the benchmark on all other rates and so that will have ultimately an impact on bringing down interest rates. What is happening in the US will certainly have an impact on that and may mean that we have to slow down the active reduction if you will because we could overheat as well and that could mean an excessive drain on our foreign exchange reserve which I mentioned it’s foreign reserves that we have to be focusing.”