Jan 2011 Financial News

Inflation up to 13.4% but repo cut to 3.5%

Jan 29, 2011

The Central Bank yesterday announced that it was cutting the ‘repo’ rate to 3.5 per cent from 3.75 per cent, even though the country’s rate of inflation jumped to 13.4 per cent in December. Yesterday’s report compiled both November and December inflation figures because the Central Bank did not publish a report last month month as a result of the industrial action taken by public servants at the Central Statistical Office.

The report in full: The final inflation figures released by the Central Statistical Office for 2010 indicate that headline inflation surged in the last two months of 2010 to reach 13.4 per cent in December compared with 12.5 per cent in October. Core inflation, however, remained virtually unchanged from October 2010 at 4.7 per cent (year-on-year). Food price inflation, which had reached a high of 39.1 per cent in August before easing to 26.7 per cent in October, rose again to 29.5 per cent as at December 2010. The unprecedented level of food price inflation is mainly due to domestic supply shocks resulting from unusually heavy floods. In December 2010, the prices of vegetables, fruits and milk, cheese and eggs were 42.5 per cent, 32.4 per cent and 11.3 per cent higher than a year earlier.

As regards core inflation, the sub-indices for Health and Alcoholic Beverages and Tobacco posted slower year-on-year increases of 3.8 per cent and 6.0 per cent, respectively while there was a 1.5 per cent decline in the sub-index for clothing and footwear. On the macroeconomic front, while recent economic indicators point to improved energy sector activity, the pace of revival in the non-energy sector remains tardy. Business firms seem to be still reticent about engaging in new investment activity while consumer sentiment, though improving, remains cautious about the economy’s growth prospects. Private sector credit by the consolidated financial system, an important gauge of demand conditions, declined for the fifteenth consecutive month by 2.5 per cent (year-on-year) led by the 5.9 per cent fall in business credit. Consumer credit, on the other hand, staged a tentative recovery in the months of October and November, growing by 1.1 per cent and 1.5 per cent, respectively. Real estate mortgage lending remains the only category of private sector credit that continues to display robust growth, rising by 7.6 per cent and 7.0 per cent in October and November, respectively.

With credit on a declining trend, liquidity levels in the financial system remained buoyant (around a daily average of $3.3 billion) for most of October 2010, driven in part by increased net fiscal injections. By mid-November, however, on the heels of the liquidity measures introduced by the Central Bank, commercial banks’ excess reserves fell to a daily average of $1.4 billion and further to $960 million in January 2011. As liquidity tightened, commercial banks needed to have greater recourse to the inter-bank market and to repurchases to meet their financing needs.In the somewhat tighter liquidity environment, short-term interest rates edged up slightly from their historic lows. The three-month treasury bill rate rose to 0.41 per cent in January 2011 from 0.28 per cent in October 2010 while the rate on six-month treasury bills inched up to 0.52 per cent in January from 0.48 per cent in November 2010.

Commercial banks’ weighted average lending rates fell to 10.28 per cent in September 2010 from 10.58 per cent in June 2010. With core inflation well anchored for the time being and with a recovery of activity in the non-energy sector continuing to be an urgent priority, the Bank has decided to reduce the ‘Repo’ rate by 25 basis points to 3.50 per cent. The Bank will continue to keep economic and monetary conditions under close review. The next ‘Repo’ rate announcement is scheduled for February 25, 2011.


Source:
Trinidad Guardian
Saturday January 29, 2011

http://guardian.co.tt/business/2011/01/29/inflation-134-repo-cut-35