Trinidad and Tobago's central bank raised its benchmark repo rate by 25 basis points to 3.0 percent "to pre-empt a potential rise in inflationary pressures and to mitigate higher portfolio outflows."
It is the first change in rates by the Central Bank of Trinidad and Tobago since September 2012 when the bank adopted an accommodative policy stance to help stimulate economic growth and encourage business and consumer lending.
But the central bank said the U.S. Federal Reserve's statement on Sept. 17 had altered market expectations about the start to higher U.S. rates as its communication suggested a change in policy stance would come sooner than anticipated, with a gradual increase in rates around mid-2015.
This had resulted in an immediate rise in U.S. Treasury yields that made U.S. dollar assets more attractive relative to Trinidad and Tobago assets.
"It has become necessary to enhance the appeal of TT dollar assets which have lower returns in relation to U.S. dollar assets, as returns on the latter will be bolstered the the Fed's expected monetary policy actions are realized," the central bank said.
Headline inflation in Trinidad and Tobago accelerated to 7.5 percent in August from 5.9 percent in July and 3.0 percent in June due to a sharp rise in food prices.
Looking ahead, the central bank said higher public spending through an expansionary 2014/15 budget is likely to add to already elevated liquidity levels of around $7 billion and potentially push up inflation in the coming year.
Core inflation, which has remained low and stable, could also accelerate due to sustained and strong growth in consumer loans and real estate mortgages, the central bank said.
Consumer loans rose by 6 percent in July, mainly for motor vehicle purchases, while real estate mortgage lending rose by over 11 percent in July, maintaining its double-digit increases.
Trinidad and Tobago's non-energy sector continued its slow but steady growth for the 11th consecutive quarter to June despite ongoing supply disruptions.
"The near-term outlook is for continued steady performance in non-energy production and a return to normalcy in energy output," the central bank said.