The Central Bank of Trinidad and Tobago raised its benchmark repurchase rate by 25 basis points for the seventh consecutive time, saying higher interest rates are considered necessary to prevent an outflow of capital that is attracted to higher U.S. dollar assets.
Trinidad and Tobago's central bank has now raised its rate by a total of 175 basis points since embarking on its tightening campaign in September. This year it has raised the rate by 125 points to 4.50 percent.
In recent months the interest rate differential between TT dollar and U.S. dollar assets has widened but the central bank said "this comfortable position" could easily reverse.
"The MPC judged higher domestic interest rates are necessary to mitigate potential capital outflows," the central bank said, adding that its policy stance is still very accommodative in the context of a contracting non-energy sector and moderate inflationary pressures.
The central bank said it would maintain an aggressive liquidity management program to strengthen the impact of rising interest rates in the financial system, adding that excess liquidity had remained at a comfortable daily average of $3.3 billion over the past three months and the median commercial prime lending rate had risen to 8-1/2 percent as of mid-September from 8-1/4 percent in July.
The outlook for Trinidad & Tobago's economy has deteriorated, the bank said, adding that provisional estimates show a contraction of close to 2 percent in the first half of this year as continued shortfalls in natural gas production led to a decline in the energy sector by an estimated 3.5 percent in the first half of the year.
In the first quarter of this year, Trinidad and Tobago's Gross Domestic Product shrank by 1.7 percent from the same 2014 quarter.
In contrast to expectations, the central bank said inflationary pressures have not materialized, with inflation ion August slowing to 4 percent from 5.6 percent in July.
The Central Bank of Trinidad and Tobago issued the following statement:
"At its September 2015 meeting, the Central Bank’s Monetary Policy Committee
(MPC) agreed to increase the ‘Repo’ rate for a seventh consecutive time by 25 basis points
to 4 ½ percent. The most influential factor behind the MPC’s decision remains the
normalization of US monetary policy which could reduce capital flows to many emerging
market economies, including Trinidad and Tobago, which is already adjusting to
persistently low energy prices. The MPC also judged the domestic monetary policy stance
as still very accommodative in the context of a contracting non-energy sector and moderate
Since the July 2015 meeting of the MPC, the global growth outlook has worsened with the
emergence of new risks. These risks included spillbacks associated with an abrupt slowdown in
the Chinese economy and a surprise devaluation of the renminbi, both of which contributed to
the US Fed keeping its policy rate unchanged at its September 2015 meeting. This delay to the
start of normalization of US monetary policy has added to the uncertainty in an already volatile
global environment. Markets now expect an increase in the Fed funds rate to take place
sometime in the remaining three months of 2015, especially given the strengthening US
economy. Over the past few months, the interest differential has widened between TT$ assets
and US$ assets, but this fairly comfortable position could easily reverse, given the sharp
fluctuations in US interest rates in 2015. The MPC judged higher domestic interest rates are
necessary to mitigate potential capital outflows.
Trinidad and Tobago’s domestic economic outlook has deteriorated. Provisional estimates
indicate the domestic economy contracted by close to 2 percent in the first half of 2015.
Continued shortfalls in natural gas production saw the energy sector decline by an estimated 3 ½
percent in the first six months of 2015. The non-energy sector, which has provided support to the
overall economy for the past few years lost momentum, declining by around 1 percent in the first
half of 2015. This decline was mainly due to a slowdown in construction, distribution and
manufacturing. Early indicators point to continued sluggish economic performance in the third
quarter of 2015.
Domestic inflationary pressures have not materialized as initially expected. On a year-onyear
basis to August 2015, headline inflation slowed to 4 percent from just over 5 ½ percent in
July 2015. Core inflation was stable at just over 1 ½ percent, while food inflation decelerated to
around 8 percent from double-digit territory of 11 ½ percent in July 2015. Although current
price pressures seem contained, disruptions to domestic agricultural supply and higher
production costs facing select food industries could lead to rising food inflation. Increased
consumer spending driven in part by recently concluded public sector wage agreements, as well
as robust consumer borrowing, could also push up inflationary pressures.
With excess liquidity remaining at a comfortable daily average of $3.3 billion over the
past three months (July – September 21, 2015), the MPC also decided to maintain an aggressive
liquidity management programme so as to strengthen the impact of rising interest rates
throughout the financial system. As at mid-September 2015, the median commercial bank prime
lending rate had increased to 8 ½ percent from 8 ¼ percent in July 2015.
The next Monetary Policy Announcement is scheduled for November 27