BEFORE a global rise in inflation and the probability of higher prices at the local level, the Central Bank yesterday opted not to raise the repo rate, its main instrument to influence the trajectory of local interest rates.
The repo rate is the interest rate at which the Central Bank is willing to provide overnight financing to commercial banks that are temporarily unable to meet their liquidity requirements.
In its quarterly monetary policy announcement, the central bank noted that the phasing out of Covid-19 restrictions boosted business operations and lending to businesses increased.
The local monetary authority also noted that the difference between the short-term interest rates of the US and Trinidad and Tobago changed from positive to negative between November 2021 and March 2022.
The following is the monetary policy announcement in its entirety:
Global economic uncertainty accelerated in the first quarter of 2022 in the wake of the Russian invasion of Ukraine and its likely impact on already rising inflation around the world. The 4.4% global growth for this year forecast by the International Monetary Fund in January 2022 is likely to be lowered based on current developments. One of the first impacts of the war is the jump in energy prices: crude oil prices (measured West Texas Intermediate) went from an average of US$71.50 per barrel in December 2021 to an average of US$103 per barrel in mid-March 2022 as sanctions on Russia disrupted supply.
Monetary policy responses have been largely in the direction of tightening. Earlier this month, the US Federal Reserve and the Bank of England raised their respective policy rates by 25 basis points. Concerns about rising domestic inflation, external price pressures on the energy front, and the impact of higher interest rates in advanced economies on potential capital flows and currency movements led to several other central banks to also raise interest rates.
Nationwide, headline inflation stood at 3.8% (year over year) in January 2022 compared to 3.9% in October 2021. Food inflation slowed to 6.6% from 7 .6% in October, partly due to the zero rate of Value Added Tax on additional food starting in November 2021. Core inflation (excluding food) remained stable around 3%. However, there are signs that imported inflation will continue to push up local prices for food and other items in the coming months.
Preliminary estimates from the Central Bank’s Quarterly Index of Economic Activity (QIEA) suggest that higher production of crude oil and petrochemicals led a return to positive growth in energy sector activity during the fourth quarter of 2021.
Although non-energy sector activity indicators point to continued weakness, the continued easing of COVID-19 restrictions has boosted business operations, supported by bank financing.
On a year-over-year basis through December 2021, commercial loans increased 4.5%, compared to a 2.2% decline averaged over the first three quarters of that year. Commercial loans were particularly strong in the construction and ‘other services’ sectors. The rise in business credit reflected some move away from consumer lending, which fell 2.4% over the course of 2021. Consumer creditworthiness may have suffered in a climate of sluggish labor conditions: The latest official labor statistics show an unemployment rate of 6.1 percent in the third quarter of 2020 that may have persisted in subsequent quarters.
Liquidity in the financial system remains ample, with commercial bank excess reserves at the Central Bank averaging around $6 billion as of early March 2022. With domestic interest rates relatively stable, rising rates global markets was reflected in a marked change in interest spreads. Specifically, the spread between Trinidad and Tobago and 90-day US Treasury securities went from +27 basis points in November 2021 to -20 basis points in March 2022.
The Monetary Policy Committee (MPC), chaired by the Governor of the Central Bank, Alvin Hilaire, considered the growing weight of external factors in current and short-term developments in Trinidad and Tobago. While higher energy prices will boost tax revenue, broader supply disruptions and higher food prices will add to imported inflation. Consensus opinion among international analysts regarding further interest rate adjustments in the US and elsewhere was also considered. At the same time, the Committee noted the first signs of a domestic economic recovery facilitated by some credit expansion, coupled with still relatively low supply-side inflation.
Taking all factors into account, the MPC agreed to keep the repo rate at 3.50 percent. The Central Bank will continue to carefully monitor and analyze international and domestic developments and prospects.
The next monetary policy announcement is scheduled for June 24, 2022.