Feb 2007 Financial News

Inflation falls to 8.6 per cent

Feb 26, 2007

The rate of inflation has declined again, falling for the third consecutive month since hitting a high of ten per cent in October last year.

Once again the fall is being attributed to a slowing down in the rate of increase of food prices.

The information was contained in the monthly Repo Rate announcement issued by the Central Bank on Thursday in which it said it was maintaining the Repo rate unchanged at eight per cent.

Quoting figures from the Central Statistical Office, the Central Bank said that headline inflation was measured at 8.6 per cent in January, down from 9.1 per cent in December and 9.6 per cent in November last year.

The bank said inflation in food prices slowed down to 20.9 per cent in January, compared to 26.5 per cent in October last year when the inflation rate hit the peak of ten per cent. The statement said the slowing of the rise in food prices was partly due to broadening of the agricultural distribution network which it said “has created more of a direct link between farmers and consumers.” The statement added “this has contributed to greater price awareness and facilitated comparison shopping among consumers.”

Following is the full text of the Central Bank’s Repo rate announcement:

Inflation eases: Central Bank maintains ‘repo’ rate at eight per cent

The latest inflation numbers released by the Central Statistical Office indicate that the rate of inflation slowed for the third consecutive month, after having peaked at ten per cent in October 2006.

Headline inflation measured 8.6 per cent on a year-on-year basis to January 2007 compared to 9.1 per cent in December 2006 and 9.6 per cent in November 2006.

Food price inflation, which had reached 26.5 per cent in October 2006 and declined to 22.0 per cent in December 2006, slowed further to 20.9 per cent year-on-year to January 2007. Increases in the food sub-index came mainly from vegetables (36.9 per cent), fruit (19.1 per cent), fish (29.8 per cent) and meat (17 per cent).

The slowing of food price inflation is partly related to the broadening of the agricultural distribution network, which has created more of a direct link between farmers and consumers. This has contributed to greater price awareness and facilitated comparison shopping among consumers.

Core inflation fell marginally to 4.4 per cent year-on-year to January 2007 from 4.6 per cent in December 2006. The current level of core inflation compares with the rate of 2.5 per cent recorded a year earlier. The increases have occurred in the sub-indices for hotels, cafes and restaurants (seven per cent) and home ownership (5.4 per cent).

Whereas the slowdown in headline inflation is encouraging, it is clear that underlying inflationary pressures have not yet been fully contained. Fiscal injections are still strong and while bank credit expansion has declined compared with a year earlier, it is still growing much faster than the current situation warrants. Moreover, cost pressures continue to lead to increases in some key food prices, most recently milk and milk products and non-alcoholic beverages.

In terms of policy, the bank has continued to adopt an aggressive stance with respect to open market operations and foreign exchange sales in order to absorb excess liquidity and to allow the interest rate channel to work more effectively.

This policy is showing increasing success as evidenced by the reduction in the level of excess reserves, greater inter-bank lending activity and a higher level of ‘repo’ transactions. Meanwhile, short-term interest rates continue to ease upwards.

The reduction in inflation will continue to be a primary focus of Central Bank policy. In February 2007, in addition to the usual open market operations, the bank executed the second of a series of bond auctions. While the initial intention was to mobilise $300 million, in the face of buoyant demand, $674 million was issued—with increased participation among individual investors. This 5 1/2 year bond, which carried a coupon rate of 7.8 per cent, was issued at par. Proceeds of this bond have been sterilised by the bank.

Meanwhile, Government’s efforts to expand the distribution system for agricultural commodities are being intensified. Steps are also being taken to increase agricultural output, though the effect of this would take some time to materialise.

The bank has decided to maintain the current “Repo” rate at eight per cent while allowing the liquidity absorption measures to continue to work towards improving conditions for the transmission of interest rate signals.

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

The next ‘repo’ rate announcement is scheduled for March 23.

Source:
The Trinidad Guardian
Saturday, February 24, 2007.
http://www.guardian.co.tt/archives/2007-02-24/business1.html