The ECCB is authorized to use a range of monetary policy instruments under the 1983 agreement. In particular, discount and rediscount interest rates, as well as differences in interest rates and caps for different transactions, are provided for under the interest rate policy. In line with the thinking carried out in developing countries at the time of its creation, the eccb agreement also provides for the allocation of credits to priority sectors, in cooperation with member state governments, as well as requirements for different reserve requirements, including reserve limits required by type of deposit. The ECCB has followed two previous agreements on strong links. The British Caribbean Currency Board (BCCB) was established in 1950 to issue the currency of most English-speaking Caribbean countries2. After independence, Guyana and Trinidad and Tobago withdrew from the BCCB to form their own central banks. His departure led to the dissolution of the BCCB in 1965 and the creation of the East Caribbean Currency Authority (ECCA). Grenada did not join the ECCA until 1968 for starting talks on a political union with Trinidad and Tobago.3 Barbados withdrew from the ECCA in 1974, after its government decided to set up its own central bank. The ecCB`s priority objective is to maintain monetary stability (price and exchange rate stability). Given the firm exchange rate, price stability will be achieved by maintaining the external value of the dollar. As a result, the exchange rate is the nominal anchor of monetary policy and the OECS/ECCU imports the credibility of inflation in the U.S. Federal Reserve System, the region`s main trading partner.
The EGCB`s vision also obliges it to guarantee the integrity of the banking system in order to create growth and development in its Member States. This mission is supported by the Bank`s institutional framework, which enables it to carry out its central mandates: (1) monetary policy, (2) liquidity management, (3) the maintenance of the payment system and (4) the regulation and supervision of the banking sector. The recently introduced sovereign debt market adds another liquidity management instrument for commercial banks. The pension market is moving towards the short end of the market (overnight, at seven days), thus complementing other facilities that offer liquidity for long periods of time. Day-to-day exchanges of funds began in September 2011 and the seven-day funds began in November 2011. Commercial banks can use their government bond holdings to obtain short-term liquidity. As in other economies, liquidity management at the OECS/ECCU proved to be a critical issue after the 2008-09 global economic and financial crisis, particularly in 2009/2010. As noted above, the requirement to hold at least 60% of its foreign exchange reserve application commitments limits the ECCB`s ability to provide cash assistance in the event of a systemic crisis within the region. As a result, banks are encouraged to seek resources through other market channels before going to the ECCB.
However, if this is not possible – or in the event of a systemic shock when all institutions are tied to the funds – the ECCB may be obliged to provide cash assistance to the banks concerned, which will put increased pressure on reserve hedging and the exchange rate.