Aug 2006 Financial News

Central Bank raises repo to 7.75 %

Aug 28, 2006

Following is the Central Bank’s repo announcement for September:

The latest inflation numbers released by the Central Statistical Office indicate that headline inflation measured 8.6 per cent on a year-on-year basis to July, roughly the same rate reported last month. Core inflation, which measured 3.35 per cent in June (year-on-year), rose to 4.0 per cent in the twelve months to July. For the month of July, core inflation increased by 1.45 per cent, the largest monthly increase recorded for the year so far.

Increases in the prices of fruit, vegetables and fish continue to be the main drivers of the rise in the cost of the food basket.

The jump in core inflation reflected increases in the cost of health services (11 per cent), education (12 per cent) and recreation and culture (9.8 per cent). In the health services category, the increases are for pharmaceutical products (prescription drugs) largely, while for educational services, they are related to tuition fees. The impact on the consumer of these increases in tuition fees is not yet clear in light of the widespread availability of free education, including at the tertiary level.

There was a sizeable increase in liquidity during August which was due in part to the disbursement of fuel subsidies. The Bank has stepped up open market operations to absorb excess liquidity. Sales of foreign exchange have also contributed to the reduction in excess liquidity.

The sustained increase in the “Repo” rate is continuing to impact on short-term interest rates and private sector credit. On a year-on-year basis to June, the growth in private sector credit slowed to 13.6 per cent from 17 per cent in January. Although overall credit growth has been slowing, consumer credit remains relatively strong. Loans to the real estate sector rose by 17 per cent in the twelve months to June compared with 12.3 per cent in March.

Over the course of the last eight months, short-term interest rates have begun to respond to the tighter monetary policy stance adopted by the Bank. Yields on three-month, six-month and one-year treasury bills have been increasing steadily and currently stand at 6.53 per cent, 7.25 per cent and 7.52 per cent, respectively.

This steady rise in domestic interest rates against the background of a pause in further monetary tightening by the US Fed has resulted in some widening of the differential between TT and US short-term rates to 126 basis points in August from 61 basis points in March. This differential is still considerably below the average of the last two years.

In light of persistent inflationary pressures, the Bank has decided to raise its overnight ‘Repo’ rate by 25 basis points to 7.75 per cent with effect from August 25, 2006.

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

The next ‘Repo’ rate announcement is scheduled for September 29, 2006.


Source: The Trinidad Guardian
Saturday, 26th August, 2006
http://www.guardian.co.tt/archives/2006-08-26/business2.html