Indirect Instruments

 

Open Market Operations: The Bank conducts open market operations through the purchase or sale of government securities to alter liquidity conditions in the financial system. High levels of liquidity especially when the economy is close to its absorptive capacity can increase credit supply and ultimately fuel inflation. Each day, the Bank assesses conditions in the financial market with a view to gauging liquidity conditions. If liquidity levels are considered too high, the Bank sells securities through the auction system to remove excess liquid funds from the system. The resources absorbed from the system are then sterilized (held in blocked accounts at the Central Bank). Conversely, if liquidity is deemed to be insufficient, the Central Bank buys securities outright or engages in short-term, collateralized lending through the repurchase facility, to add liquidity to the system. Securities used in open market operations are mainly Government of Trinidad and Tobago treasury bills and treasury notes.

 

The Repurchase rate (Repo Rate): In May 2002, the Central Bank introduced the Repo rate, which is the rate at which the Central Bank is prepared to provide overnight financing to commercial banks that are temporarily unable to meet their liquidity requirements. The announced Repo rate is the principal instrument used by the Central Bank to influence the structure of commercial banks’ interest rates. Changes in the rate are intended as important signals to the market of the Bank’s monetary policy stance.