The central bank of Trinidad and Tobago raised the ‘Repo’ rate for a sixth consecutive time by 25 basis points to 4 ¼ percent. The Central Bank’s Monetary Policy Committee (MPC) announced on July 31st, that at its July 2015 meeting it was agreed to lift the repo rate.
The Repo rate increased by 150 basis points since September 2014, but this is still below its longer-term average, the release from the bank stated. The MPC, therefore, views the monetary policy stance as supportive to economic growth.
The MPC said it based its latest decision on three factors. The first and most influential factor was recent forward guidance by the US Fed on the start of normalization of U.S. monetary policy. The second factor was the potential for domestic core inflationary pressures to pick up over the next few months. The third factor was weaker-than-anticipated growth in the non-energy sector in the first half of 2015, this latter reason seems odd as increased rates are likely to worsen the output of the sector.
Locally, rising inflationary pressures remain a concern for the MPC. Headline inflation held steady at just over 5 ½ percent in June 2015, while core inflation slowed marginally to just below 2 percent. However, the MPC expects inflationary pressures to pick up in the remaining months of 2015 due to a number of factors:
• Food inflation accelerated for the first time in 2015 spurred by rising input costs (specifically poultry) and falling supply associated with the outbreak of a pest in the Dominican Republic, a major source market for fruits and vegetables. In June 2015, food inflation rose to 9.7 percent. The advent of the rainy season raises the possibility of flooding and may lead to additional disruptions to domestic agricultural supply, further pushing up food inflation, which drives headline inflation.
• Consumer credit continues to grow at a fairly strong pace, increasing by 7 ½ percent in May 2015. Recently concluded public sector wage agreements are expected to lift consumer spending and inflationary pressures.
• Central Government maintained an expansionary fiscal stance in the first eight months of 2015. Capital expenditure, in particular, increased by nearly 9 ½ percent due to a pick-up in the pace of project implementation as well as the settlement of some outstanding commitments. The MPC expects public spending to ramp up in the remaining four months of fiscal 2015, boosted by higher public sector wages and ongoing capital infrastructure projects ahead of the general elections.
Despite slower -than- expected- growth in the non-energy sector in the first half of 2015, the MPC anticipates a respectable performance in the non-energy sector in the second half of 2015.
With liquidity levels falling to a daily average of $3.2 billion over the past three months (May – July 2015), the MPC agreed to continue with an aggressive programme to absorb excess liquidity and strengthen the impact of higher interest rates throughout the financial system. Commercial banks’ median prime lending rate increased to 8 ¼ percent in July 2015 from 8.00 percent in May 2015. Commercial banks are expected to further increase their interest rates in coming months.
The movement in rate is having a negative impact on the country’s stock market with prices slipping in recent weeks with few days of advancing stocks being more than declining ones and 11 trading days with the main indices being down between the August 3 and 21.