Answered step by step
Verified Expert Solution
Question
1 Approved Answer
You are listening to a televised debate on one of the local news channels. The audience can ask questions from the panelists by making a
You are listening to a televised debate on one of the local news channels. The audience can ask questions from the panelists by making a phone call. The discussion is about the evolution of monetary policy in Trinidad and Tobago in the difficult times of COVID-19 pandemic. Panel members are arguing that in order to avoid a recession metamorphosing into a depression, a significant monetary policy response is required. Someone on the panel mentions that in March 2020, the Monetary Policy Committee (MPC) decided to lower not only the Repo rate to 3.50 percent but also the primary reserve requirement on commercial bank deposits was reduced to 14 percent. Another panelist chimes in to point out that the overnight interbank rate has remained unchanged at 0.50 percent, which does not seem in line with the direction of other interest rates. To support his argument, he says that the interest rates quoted by the commercial banks for lending and depositing have also been declining during the first half of 2020. Even the short-term rates have declined and the 91-Day T-Bills are down to 0.96 percent. The host of the debate then flashes the 30-year TT Yield curve between December 2019 to August 2020 and the discussion takes a turn towards that direction. The yield curve is reproduced below: TRINIDAD AND TOBACO CENTRAL GOVERNMENT TREASURY YIELD CURVE December 2019 to August 2020 7,0 60 300 50 2000 40 100 30 Yuld el prands 20 -100 10 Spread December 19 00 Source: Central Bank of Trinidad and Tobago While you are studying the yield curve, your phone begins to ring and the call being urgent, you decide to receive it. The T.V. goes on in the background and you hear broken bits about someone wondering at the yield curve. A lady named Judy has just phoned the T.V. panel and her question is that despite the high liquidity that may linger on till at least the medium term and that a lenient monetary policy may need to continue for some time, why is it that investors continue to attach higher risk and term premium on long-term government securities? At that moment, you step out of the room and drive off to attend to an important matter that you have been told about on the phone. Given this episode in your life on a certain day, answer the following questions: a) Why has the MPC decided to lower key rates like the Repo rate and reserve requirements? b) What might be the reason for not changing the overnight interbank rate? c) What might be the reason for a fall in lending and deposit rates by the commercial banks in Trinidad and Tobago? d) If you were on the discussion panel, what answer would you provide for Judy's question? e) Why do you think Judy said that investors are attaching a higher risk and term premium on long-term government securities in spite of high liquidity? You are listening to a televised debate on one of the local news channels. The audience can ask questions from the panelists by making a phone call. The discussion is about the evolution of monetary policy in Trinidad and Tobago in the difficult times of COVID-19 pandemic. Panel members are arguing that in order to avoid a recession metamorphosing into a depression, a significant monetary policy response is required. Someone on the panel mentions that in March 2020, the Monetary Policy Committee (MPC) decided to lower not only the Repo rate to 3.50 percent but also the primary reserve requirement on commercial bank deposits was reduced to 14 percent. Another panelist chimes in to point out that the overnight interbank rate has remained unchanged at 0.50 percent, which does not seem in line with the direction of other interest rates. To support his argument, he says that the interest rates quoted by the commercial banks for lending and depositing have also been declining during the first half of 2020. Even the short-term rates have declined and the 91-Day T-Bills are down to 0.96 percent. The host of the debate then flashes the 30-year TT Yield curve between December 2019 to August 2020 and the discussion takes a turn towards that direction. The yield curve is reproduced below: TRINIDAD AND TOBACO CENTRAL GOVERNMENT TREASURY YIELD CURVE December 2019 to August 2020 7,0 60 300 50 2000 40 100 30 Yuld el prands 20 -100 10 Spread December 19 00 Source: Central Bank of Trinidad and Tobago While you are studying the yield curve, your phone begins to ring and the call being urgent, you decide to receive it. The T.V. goes on in the background and you hear broken bits about someone wondering at the yield curve. A lady named Judy has just phoned the T.V. panel and her question is that despite the high liquidity that may linger on till at least the medium term and that a lenient monetary policy may need to continue for some time, why is it that investors continue to attach higher risk and term premium on long-term government securities? At that moment, you step out of the room and drive off to attend to an important matter that you have been told about on the phone. Given this episode in your life on a certain day, answer the following questions: a) Why has the MPC decided to lower key rates like the Repo rate and reserve requirements? b) What might be the reason for not changing the overnight interbank rate? c) What might be the reason for a fall in lending and deposit rates by the commercial banks in Trinidad and Tobago? d) If you were on the discussion panel, what answer would you provide for Judy's question? e) Why do you think Judy said that investors are attaching a higher risk and term premium on long-term government securities in spite of high liquidity
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started