Jun 2008 Financial News

Inflation down...rate falls to 9.3 per cent

Jun 02, 2008

The rising price of food was once again the driving force in inflation.

Inflation in T&T retreated slightly last month, falling to 9.3 per cent from 9.8 per cent at the end of March.

The information was contained in the latest ‘repo’ rate announcement issued yesterday by the Central Bank.

The reduction in the inflation rate was traced to a slowing in the pace of food inflation—the rate at which food prices are increasing. Food prices rose by a slower 19.5 per cent in April compared to 19.7 per cent in March.

The report said food price increases were led by increases in the price of bread and cereals, oils and fats and fruits. It added that, “The significant increases in the global prices for wheat, rice and edible oils have contributed, in part, to the higher domestic prices for bread, cereals as well as for butter and other edible oils.”

Following is the full text of the ‘repo’ rate announcement:

‘Repo’ rate at

8.25 per cent

According to the latest data on inflation released by the Central Statistical Office, headline inflation measured 9.3 per cent on a year-on-year basis to April 2008, compared to 9.8 per cent in March 2008. Food inflation, the main catalyst of headline inflation, rose by 19.5 per cent year-on-year to April compared with an increase of 19.7 per cent in the previous month. The increase in food prices was led by bread and cereals (26.1 per cent); oils and fat (18.2 per cent) and fruits (27.6 per cent). The significant increases in the global prices for wheat, rice and edible oils have contributed, in part, to the higher domestic prices for bread, cereals as well as for butter and other edible oils.

Core inflation, which filters out the effects of food prices, declined slightly to 5.2 per cent in the 12 months to April 2008 from 5.7 per cent in the previous month. This slight reduction in the core inflation rate reflected slower year-on-year increases in the sub-indices for housing (2.1 per cent compared with 3.2 per cent in March 2008), health services (5.7 per cent compared with 7.1 per cent) and recreation and culture (5.8 per cent compared with 14.1 per cent). The sharp reduction in the recreation and culture sub-index reflected a slower increase in airfares. The sub-indices for education and “meals-out” however, posted increases of 16.4 per cent and 19.2 per cent, respectively.

Although net domestic fiscal injections continue to add to liquidity in the financial system, intensified open market operations by the Central Bank have contributed to tighter liquidity conditions over the past month. This has led commercial banks to make greater use of the inter-bank market and the “Repo” window at the Central Bank to meet their financing needs.

The increase in commercial banks’ lending rates in march following the rise in the ‘Repo rate’ had a dampening effect on consumer credit, which slowed, on a year-on-year basis, to 18.4 per cent in March 2008 from 22 per cent in January. The pace of increase in real estate mortgage lending also decelerated to just below 20 per cent from 22 per cent in January.

Despite the slight easing in April, underlying inflationary pressures are still strong, underpinned by buoyant economic growth, a high level of public spending and rapid bank credit expansion. Moreover, inflationary expectations remain high as announced increases in the prices of some basic food items (flour and rice) and in transportation (taxi fares) are scheduled to take effect in upcoming months.

In addition, capital inflows from the amalgamation of the Royal bank of Canada (RBC) and RBTT along with the recent approval of supplementary government expenditure of around TT$3.5 billion are likely to add to inflationary expectations even before they contribute to increased liquidity. The Central Bank and the Ministry of Finance are currently formulating steps to dampen the impact of the RBC/RBTT amalgamation through special sterilisation measures.

Given the many factors listed above and the limited prospects of a major decline in domestic and global food prices, inflation risks are tilted to the upside in the forthcoming months. The bank will continue to place increased emphasis on liquidity absorption in a bid to further dampen credit expansion but will keep monetary conditions under close review and will take additional action as required.

Against this background, the bank has decided to maintain the ‘Repo’ rate at 8.25 per cent.

The next ‘Repo’ rate announcement is scheduled for june 20, 2008.


Source:
The Trinidad Guardian
Friday May 30, 2008

http://www.guardian.co.tt/archives/2008-05-30/business1.html