Trinidad and Tobago’s central bank maintained its accommodative policy stance by leaving the repo rate at its historic low of 2.75 percent but cautioned that inflationary pressures could rise in the coming year.
The Central Bank of Trinidad and Tobago, which has kept its rate steady since September 2012, said a strengthening economic recovery, rising consumption and the threat of higher international agricultural commodity prices suggest inflationary pressures could rise.
“With a firmly established economic recovery, the Central Bank will start giving more weight in its monetary policy deliberations to managing rising inflationary pressures,” Governor Jwala Rambarran said in an address to Tobago’s house of assembly, only the second time in the bank’s 50-year history that it has ventured outside the Port of Spain.
At first, the central bank would start gradually withdrawing the accommodative stance but “should the outlook for inflation, growth, or financial stability change, we will take appropriate action,” he added.
So far inflationary pressures have been subdued, with headline inflation of 3.5 percent in April, down from 4.5 percent in March, due to a steady fall in food price inflation from improved agricultural output and an easing of global food prices.
Core inflation, which excludes food, picked up to around 2.5 percent but has remained stable, a sign of improving economic activity, Rambarran said.
After contracting for a year, business lending is starting to pick up, with business loans by the banking system up by 3.5 percent in March after an increase of a little over 2 percent in February.
Rambarran said economic growth this year is expected to rise to at least 2.5 percent, up from a faster-than-expected 2 percent last year.
Large-scale maintenance and safety upgrades at energy companies posed a considerable drag on Trinidad and Tobago’s economic growth throughout 2013, with the impact concentrated in the third quarter when most of the upgrades occurred.
In the first two months of this year two, there were further disruptions to energy production, but energy output bounced back by March and the non-energy sector - including construction, new car sales and agriculture - has maintained its growth momentum.
Drilling in shallow water blocks is now under way and some new development wells have also been drilled and the awarding of further onshore bids will lead to increased exploration in these blocks in late 2014 or early 2015, Rambarran said.
In addition, there has been an improvement in the pace of project execution by the central government, further boosting non-energy activity.
In the past few years, the government budget has been the main stimulus supporting growth in Trinidad and Tobago, with the non-energy deficit the key indicator of whether it is engaged in fiscal stimulus.
In fiscal 2012/13 the central government ran a non-energy budget deficit of $19 billion and in the first six months of fiscal 2013/14 the deficit amounted to $12 billion, on track to reach its projected stimulus.
The central bank recently changed its 20-year old system for selling and distributing foreign exchange to banks to manage growing demand, but Rambarran said he was not at liberty to divulge all the details of the bank’s operations.
“I, therefore, want to assure the country that there is no risk of devaluation of our dollar. We have enough foreign exchange reserves to satisfy demand,” he said.
As of mid-May, the stock of foreign exchange reserves was almost US$ 10.5 billion, more than enough to cover one year of imports, he said.
The country’s foreign exchange market experiences times of tightness as demand for foreign exchange by the general public and business community is continuous throughout the year while supply by companies in the energy sector is in intervals.
To maintain an orderly market, the central bank sells foreign exchange from its stock of official reserves to the banks.
Over the last 20 years, demand for foreign exchange has not only risen, but its composition had changed due to new types of spending, including credit cards for online purchases, and new forms of investment as citizens can move money freely abroad.
In 1993 the demand for foreign exchange amounted to $US900 million dollars, but by 2013 this had ballooned to $US7.0 billion.
At the same time, the supply of foreign exchange increased, but was outstripped by demand.
In 1993 the supply of foreign exchange amounted to $US856 million and in 2013 it amounted to US$ 5.8 billion.
“This prompted the Central Bank to intervene with increasing volumes of foreign exchange to quell excess demand pressures,” Ramarran said.
In 1993 the Central Bank sold a mere $US33 million; this jumped to almost $US500 million by 2003 and in 2013 the Central Bank sold $US1.7 billion to the banking system, he said.