Jan 2008 Financial News

Inflation dips to 7.6 per cent in 2007; Repo rate remains unchanged

Jan 30, 2008

The final inflation figures for 2007, released by the Central Statistical Office, indicate that headline inflation slowed to 7.6 per cent in the 12 months to December 2007 from 9.1 per cent in December 2006 and a high of 10.0 per cent in October 2006. Food price inflation slowed to 16.8 per cent on a year-on-year basis in 2007, from 22.0 per cent in December 2006 and from 26.5 per cent in October 2006. Core inflation, which filters out the effect of food prices, slowed to 3.9 per cent in 2007 from 4.6 per cent in 2006.

The decline in inflation in 2007 fell somewhat short of the official seven per cent target. However, in light of the unanticipated exogenous influences - most notably the significant global increase in food prices, the depreciation of the US dollar and the unprecedented rise in international energy prices - the reduction achieved represents considerable progress.

The decline in food prices in 2007 is largely attributable to the broadening of the agricultural distribution network which has created more of a direct link between farmers and consumers. This contributed to greater price awareness and facilitated comparison shopping among consumers. This decline notwithstanding, the level of food prices in Trinidad and Tobago continues to be a cause for concern and underscores the urgent need for a major expansion in domestic agricultural production. The Government has recently outlined a programme to boost production in the agricultural sector while Caricom countries are also discussing a regional approach to counter rising food prices.

During 2007, fiscal injections continued to be very strong. The non-energy fiscal deficit remained at around 15 per cent of GDP for the second consecutive year compared with 11 per cent in fiscal 2005. Notwithstanding an increase in interest rates, private sector credit by the consolidated financial system continued to increase at a brisk pace facilitated by strong growth in consumer credit.

In these circumstances, the relative success in reducing inflation in 2007 owes much to an aggressive programme of liquidity absorption.

Intensified open market operations led to the withdrawal, on a net basis, of $6.6 billion in 2007 compared with $626 million in 2006, while an additional $1.7 billion was removed from the system through the auction of long-term government bonds, the proceeds of which were sterilised at the Central Bank. The sale of foreign exchange also assisted with liquidity absorption. These actions resulted in a decline in the average level of excess reserves to $256 million in 2007 from $406 million in 2006. This tightening was reflected in increased activity in the interbank market. Commercial banks also accessed the "Repo" window at the Central Bank more frequently to meet their financial needs.

The relatively tight monetary policy stance has impacted short-term interest rates which trended upwards in 2007. The discount rate on the 3-month treasury bills increased to 7.0 per cent in December 2007 from 6.74 per cent in December 2006 while the interbank rate rose from an average of 6.19 per cent in 2006 to 7.23 per cent in 2007.

The Government has set an inflation target of 6.0 per cent for 2008. In the face of rising global food inflation, the achievement of this target will require a reduction in fiscal injections, a tighter monetary policy stance and an intensification of liquidity absorption. The revitalization of agricultural production will also facilitate inflation reduction. The Bank is in the process of finalising its monetary policy measures for 2008 including its programme of liquidity absorption.

The Bank has decided to maintain the "Repo" rate at 8.00 per cent and will continue to keep economic and monetary conditions under close review.


Source:
Business Express, Page 13
Wednesday, January 30th 2008

http://www.trinidadexpress.com/index.pl/article_business_mag?id=161271101