Economic Activity in OECS Contracted in 2010

According to an official release from the Bank, following the meeting, it was  noted that economic activity in the ECCU contracted by 4.0 percent in the period January to September 2010, relative to the comparable period in 2009.

This decline was driven mainly by a fall in investments in both public and private sectors and the continued impact of the financial crisis on government revenues, tourism and foreign direct investment.

The release confirmed that external demand from traditional trading partners is likely to remain subdued with tourist arrivals and private capital inflows in particular, projected to remain below pre-crisis levels. Inflationary pressures are expected, particularly if the recent increase in commodity prices is fed through to a generalized increase in consumer prices. The real effective exchange rate is forecast to remain at current levels.

The Bank quoted the monetary and credit conditions which were evident in the ECCU during the year to September 2010, and in particular the following: an increase in credit to the private sector by 2.0 percent, a faster rate than over the comparative period in 2009; the gradual easing of credit conditions which has resulted in lower nominal lending rates for some ECCU countries; a decline in real lending rates by 0.7 percent, primarily as a result of higher inflationary pressures; a marginal decline in liquidity in the banking system in the second half of 2010; a marginal decline in the ratio of gross foreign assets to demand liabilities from 95.9 to 95.6 percent the end of September 2009, well above the statutory level of 60 percent and the operational target of 80 percent.

The release indicated that, “This decline can be largely attributed to the deceleration in reserve growth, partly due to the global financial crisis, and an expansion of domestic liabilities”.

The Monetary Council also agreed that in the current environment, the focus of monetary policy remains the protection of the stability of the financial system and the maintenance of the credibility of the currency to support economic recovery.

It is the finding of the Bank that, policies geared towards alleviating macroeconomic and financial system stresses must also take into account the need to maintain sufficient foreign reserves to keep the currency peg credible.

In the present circumstances, changes in the Central Bank’s administered interest rates, the Central Bank discount rate and the minimum savings deposit rate, are not likely to be effective in addressing the challenges in the financial system or the real sector.

Accordingly, Council directed that the Central Bank maintain the minimum savings deposit rate at 3.0 percent and the Central Bank’s discount rate at 6.5 percent. Council received the Governor’s Report on Monetary and Credit Conditions in accordance with Article 7(2) of the Eastern Caribbean Central Bank Agreement 1983.


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