management in trinidad and tobago : a chronology, 1964 - 2004, central bank of trinidad and tobago, 2004 for a review of the evolution of the monetary policy instruments. “ repo rate ”, which broadly represents the interest charge on banks needing to borrow from the central bank ; movements in the repo rate would not only affect the potential cost of funds for the banks but would serve as a wider signal on the central bank ’ s intentions for the path of interest rates in the economy. 6. but this requires constant adaptation to market behaviors, and could over time be even more complicated with the advent of digital currencies. the use of indirect instruments has considerable merit by allowing market forces to operate ; in this way a small change in interest rates for example could ripple through the financial system, with institutions reacting based on their particular circumstances and needs. in contrast, the blunt direct tools would largely be unable to discriminate among financial institutions, notwithstanding their differing situations. indirect paths however do require a deep understanding of how the central bank ’ s tools would work their way through the financial system — in economic parlance, the ‘ transmission mechanism ’ of monetary policy. this world is inhabited by moving parts such as behavioral functions, reaction functions, anticipations and expectations that are not always stable and that often operate with varying lags. to take a practical example, the central bank may wish to raise interest rates in the economy by selling securities ( open market operations ) ; the idea is that as financial institutions invest in these securities this would push up interest rates. alternatively, the bank may opt to increase the repo rate on the expectation that other interest rates would rise as the cost of potential commercial bank funding from the central bank goes up. but in both circumstances, if financial institutions have a lot of excess funds on their hands, then interest rates may not rise at all! the point is that the central bank has to be consistently monitoring the markets and gauging reactions for indirect instruments to be successful. at times, moral suasion has to be employed — telling financial institutions how they are expected to behave — to reinforce the signaling effect of an action. looking ahead, with digital currencies likely on the near horizon, the very definitions and measurement of money and credit are up for grabs and could further complicate how monetary policies operate. 7. trinidad and tobago currently remains in what may still be the early stages of adjustment to a potentially permanent shift in the terms of trade. the declines in the

years, we carried out an indepth review of the framework for, and strategy around, the mortgage measures. 9 we see the measures as a permanent feature of the mortgage market, so it is important that we periodically take stock of our overall approach. a lot has changed since the measures were introduced and this review allowed us to assess whether they remain fit for purpose and designed in a way that prepares them for the future. our overall conclusion was that the measures have been operating broadly as intended since their introduction. as i mentioned earlier, they have been critical in ensuring that lending standards in the mortgage market remain sustainable. this has entailed significant benefits for society as a whole, especially over a prolonged period of low interest rates and in an environment of a persistent supply - demand imbalance in the housing market. at the same time, we also judged that the costs of the previous calibration of the measures had also gradually increased. at its core, this is because housing supply has not kept up with housing demand in recent years. this imbalance between housing supply and demand has led to both house prices and rents increasing faster than household incomes. this has resulted in a gradual increase in the costs of our previous calibration, especially for first - time buyers. beyond developments in the housing and mortgage markets, as part of our review, we also considered broader trends in the economy and financial system. the resilience of the household sector as a whole has continued to improve since 2015, evident in lower levels of household indebtedness. the resilience of the banking sector has also strengthened considerably, bolstered by our macroprudential regime for bank capital and broader reforms and supervisory interventions since the global financial crisis. it was the combination of these three judgements – the significant benefits that the measures continue to entail, the gradual increase in some of the costs, and the additional policy space afforded by broader developments in the economy and financial system – that led us to conclude that a targeted recalibration of the mortgage measures was appropriate. the mortgage measures will continue to maintain sustainable lending standards in the mortgage market. even following the targeted recalibration, the measures remain prudent in a european context. this is appropriate, given the more volatile nature of both the irish economy and the irish housing market, relative to european peers. more broadly, though, from the perspective of society as a whole, it is crucial that the overall policy mix continues to focus on the supply