Dec 2010 Financial News

Inflation falls to 12.5 percent

Dec 02, 2010

The following is Central Bank’s Repo Rate report for November 2010.

Recent data released by the Central Statistical Office indicate that headline inflation slowed to 12.5 percent (year-on-year) in October 2010 from 13.2 percent in the previous month.

The October outcome represented the second consecutive year-on-year slowdown in the headline rate for 2010 thus far. On a monthly basis, headline inflation contracted by 1.3 percent in October 2010 compared to a decline of 0.6 percent in September 2010.

Food price inflation, which has been the major catalyst for headline inflation, slowed to 26.7 percent (year-on-year) in October 2010 from 29.2 percent in September.

The slower increase in food prices came mainly from declines in the prices of bread and cereals (-3.1 percent) and oils and fats (-2.6 percent). There was also some moderation in the price increases for fish (9.0 percent in October compared with 13.7 percent in September) and vegetables (37.9 percent in October from 48.6 percent in September). In contrast, faster price increases were recorded for meat (5.2 percent), milk, cheese and eggs (9.6 percent), fruit (33.4 percent) and sugar and confectionery products (6.7 percent).

Core inflation, which had been hovering around 4.1 percent (year-on-year) for the past three months, expanded at a slightly faster rate of 4.7 percent in October.

The acceleration in the core inflation rate has been driven, in the main, by increases in the subindices for recreation and culture, and transportation. In the case of recreation and culture, the increase reflected higher costs for packaged holidays while higher prices of new motor vehicles contributed to the rise in the transportation sub-index.

Sluggish demand has been placing a severe drag on private sector credit, which continued to decline albeit at a slower pace. In the twelve months to September 2010, private sector credit by the consolidated financial system fell by 2.7 percent on a 12-month basis, following contractions of 6.2 percent and 5.5 percent in July and August, respectively.

Among the major categories of credit, consumer lending, which seemed to have been staging a partial recovery in the months of July and August, fell by 0.4 percent in September.

Business lending also declined, though more moderately than in previous months, by 6.8 percent in September from -11.3 percent and -10.1 percent in July and August, respectively. An examination of the sectoral distribution of business credit reveals significant contraction in commercial bank lending to the manufacturing (-15.0 percent), construction (-6.5 percent) and distribution (-19.0 percent) sectors.

Real estate mortgage lending has however remained the only category of lending to register a consistent growth performance for the past several months, rising by 8.4 percent (year-onyear) in the 12 months to September.

Large net fiscal injections, along with a relatively unenthusiastic demand for credit, have kept liquidity quite buoyant, with excess reserves climbing to a new record high of over $4.1 billion in early November.

In order to keep liquidity at a manageable level, commercial banks were requested on November 4, 2010 to place $1 billion in an interestbearing account at the Central Bank for a period of 18 months.

Simultaneously, existing commercial bank deposits totalling $1 billion that were due to mature were also rolled over for an extra year.

These measures, along with the additional sales of foreign exchange, have helped to reduce excess reserves in the banking system to just around $1.4 billion. In the still liquid environment, commercial banks had no need to access the “repo” window at the Central Bank to satisfy their financing needs.

Notwithstanding the removal of a significant quantum of excess liquidity from the system, short-term interest rates remained at record low levels. The three-month treasury bill rate fell to 0.31 percent in November from 0.35 percent in October while the six-month treasury bill rate dropped to 0.48 percent from 0.50 percent in September.

With the consumer and business environment still displaying some degree of fragility, the Bank has decided to reduce the repo rate by 25 basis points to 3.75 percent in order to provide further stimulus to domestic demand and private investment.

The Bank will continue to keep economic and monetary conditions under close review.

The next “Repo” rate announcement is scheduled for December 23, 2010.


Source:
Newsday
Thursday December 2, 2010

http://www.newsday.co.tt/businessday/0,131832.html