The Central Bank of Trinidad and Tobago held its benchmark repo rate steady at 2.75 percent, saying its accommodative policy stance was appropriate in light of contained price pressures and economic growth that remains weaker than expected.
The central bank, which cut rates by 25 basis points in 2012, said private sector credit growth remained subdued but the financial system was highly liquid and it "stands ready to employ additional measures in the coming months to contain excessive build-ups in financial system liquidity."
In response to the large build-up of liquidity - commercial banks' daily excess reserves at the central bank averaged $6.5 billion during May 1-21, up from $5.3 billion in April - the central bank facilitated the issue of a $1 billion liquidity absorption bond. With the proceeds sterilized, excess reserves fell to $5.8 billion on May 21 from over $7 billion earlier in the month.
In addition, the central bank sold foreign currency, removing $637 million from the system and rolled over a $1 billion fixed deposit held by commercial banks at the central bank.
"Nevertheless, with liquidity still at elevated levels, there was no activity on the inter-bank market and banks did not access the central bank's repo facility," the bank said.
Given the high levels of liquidity, treasury rates have remained depressed and banks lowered their lending rates early this year to encourage credit demand.
Headline inflation rose by 1.5 percent in April from March, but on an annual basis, the inflation rate fell to 5.5 percent from 6.9 percent.
For the first time since October 2011, food price inflation slowed to single digits, reaching 9.4 percent in April, down from 26.2 percent in April 2012 and 15.0 percent in April 2011.
"The recent slowdown in headline inflation and the continued stability in core inflation suggest that general price pressures are contained, although food price pressures may increase in coming months with the advent of the rainy season," the central bank said, adding that "economic growth is still not as strong as expected, underlined by the further contraction in business credit.
On an annual basis private sector credit granted by the financial system grew by 2.0 percent in March, down marginally from 2.1 percent in February while business lending contracted for the fourth consecutive month, down by 2.4 percent year-on-year in March.
Trinidad & Tobago's Gross Domestic Product contracted by an annual 0.39 percent in the fourth quarter of 2012 and earlier this month the central bank said in its monetary policy report that it was still forecasting 2.5 percent growth this year, up from 0.2 percent in 2012, based on a rebound in natural gas production.