Feb 2006 Financial News

Repo up to 6.5 per cent

Feb 24, 2006

Recent inflation data released by the Central Statistical Office point to persistent inflationary pressures with headline inflation increasing by 7.04 per cent year-on-year to January 2006.

Food prices, which rose by 22.8 per cent on a year-on-year basis to January, continued to provide the impetus for the rise in headline inflation. Core inflation, which excludes the impact of food prices, declined to 2.5 per cent in January 2006 (year-on-year) from 2.8 per cent one year earlier.

Financial conditions in January were little changed from the second half of 2005. Bank credit expanded at a rapid pace, and the high level of the net domestic fiscal deficit continued to propel the growth in liquidity in the financial system.

In December 2005, the Central Bank required commercial banks to deposit $1 billion in an interest-bearing account, which had the effect of dampening liquidity conditions. The bank continued to engage in active open market operations and, since the beginning of 2006, absorbed some $1.9 billion in liquidity through foreign exchange sales.

In 2005, private sector credit expanded by 21 per cent with consumer credit growing faster (by 24 per cent) than credit to businesses (16 per cent).

With the continued increase in the Fed Funds rate to 4.5 per cent in January 2006, the differential between TT and US short-term interest rates has narrowed sharply to 55 basis points from 198 basis points in February 2005. This narrowing of the differential has contributed to a strong demand for foreign exchange.

Against the background of persistent inflationary pressures and a sharp fall in the spread between TT and US dollar short-term interest rates, the Central Bank has decided to increase the “Repo” rate by 25 basis points to 6.50 per cent from 6.25 per cent with effect from February 24, 2006.

The Bank will continue to keep monetary conditions under review.

The next “Repo” rate announcement is scheduled for March 24.

The Trinidad Guardian
Friday, 21st February, 2006.
http://www.guardian.co.tt/business2.html