Monday, February 1, 2016

Trinidad holds rate after 8 hikes in a row, inflation drops

    Trinidad and Tobago's central bank left its benchmark repo rate steady at 4.75 percent after eight consecutive rate hikes, citing the "prevailing economic climate and the short-term outlook."
    The Central Bank of Trinidad and Tobago (CBTT) raised its rate by a total of 200 basis points from September 2014 through December 2015, but said that the inflationary outlook for 2016 is expected to be affected by contained demand and the reduction in Value Added Tax (VAT) to 12.5 percent from 15.0 percent along with the expansion of VAT-eligible items.
   The headline inflation rate in December was 1.5 percent, up from November's 1.4 percent, but below October's 3.2 percent when inflation accelerated due to a 15 percent increase in the price of diesel and super gasoline in the government's 2015/16 budget.
    Food inflation slowed to 2.7 percent in December from 6.1 percent in October and 14.6 percent in January 2015.
    In December the CBTT said the introduction of VAT on all previously-exempt items, most of which are in the food basket of the inflation measure, could push core inflation to almost 3.5 percent and food inflation into double digit territory so inflation to pick up to around 5 percent in early 2016.
    Domestic crude oil and natural gas output fell in the October-November period, with the fall in gas output affecting downstream industries and data point to tepid activity in some non-energy sectors.
    Although there have been reports of layoffs in construction, manufacturing and energy sectors, the CBTT said labour market conditions still appeared favorable. But the persistence of low oil prices suggest that fiscal stimulus is likely to be constrained in coming months.
    With long-term interest rates in the U.S. slipping in response to investors searching for safe haven, the spread between TT and US 10-year yields widened to 187 basis points as of Jan. 25 from 161 points in December, the central bank said.
    The central bank considers higher domestic rates to be necessary to keep returns on TT assets competitive to curb portfolio outflows and discourage heavy consumer borrowing for the import of consumer durables, major source of demand for foreign exchange.
    The Trinidadian dollar was trading at 6.43 to the U.S. dollar today, slightly down from 6.42 at the start of the year.
    It is the central bank's first monetary policy decision under its new governor, Alvin Hilaire, former deputy governor. Hilaire was appointed by by the country's president with effect from Dec. 23, 2015 following weeks of local speculation about the standing of Governor Jawala Rambarran.
    On Dec. 4 Rambarran had said that Trinidad and Tobago was in recession and named a number of private firms that were buying foreign exchange. His comments were disputed by both the finance minister and the prime minister.
   Speaking to journalists last month, Hilaire said he would not distance himself from the statements made by Rambarran, the only T&T governor to have been fired.
    The Gross Domestic Product of Trinidad and Tobago expanded by 1.5 percent in the third quarter from the second quarter but on an annual basis GDP in the third quarter contracted by 2.0 percent, after shrinking by 2.2 percent in the second quarter and 1.5 percent in the first quarter.

    The Central Bank of Trinidad and Tobago issued the following statement:

"The volatility in international financial and commodity markets experienced at the end of 2015 persisted into January 2016. Despite steady economic activity and stable unemployment, concern about global developments prompted the US Federal Reserve to keep interest rates on hold in January following the first rate increase since 2008. Commodity prices remained soft, with energy prices in particular tumbling to a 10-year low in early January 2016.

Domestically, crude oil and natural gas production fell during the period October- November 2015, with the slippage in gas output in particular continuing to negatively impact the downstream industries. Available data over this period also allude to tepid activity in some of the non-energy sectors, most notably distribution and construction. Although there have been recent reports of lay-offs across the construction, manufacturing and energy sectors, labour market conditions still appear broadly favourable, with demand for low to semi-skilled workers remaining relatively buoyant. The persistence of low oil prices suggests that fiscal stimulus to the economy is likely to be severely constrained in coming months.

Meanwhile, headline inflation continued to decelerate. According to the Central Statistical Office’s Retail Price Index (RPI), headline inflation measured 1.5 per cent in December 2015 and 1.4 per cent in November 20151. This represented a slowdown from 3.2 per cent in October 2015. In the final quarter of 2015, core inflation hovered around 2.3 per cent, slightly above the levels experienced over the first nine months of the year, due in part to an increase in fuel prices announced in the 2015/2016 Budget. On the other hand, food inflation  slowed significantly to 2.7 per cent in December compared with 6.1 per cent in October, and 14.6 per cent in January 2015. While aggregate demand conditions are expected to be contained, the inflationary outlook for 2016 will also be affected by the net impact of a reduction of the VAT rate to 12.5 per cent from 15 per cent alongside an increase in the VAT-eligible items. Weather-related shocks could also affect the behaviour of food prices.

Recent commercial bank statistics show relatively high liquidity levels in December 2015 to late January 2016; banks’ excess reserves at the Central Bank averaged $3.4 billion in December and $4.0 billion for most of January 2016. The Central Bank continued to utilize its various instruments, principally open market operations, Treasury bills and special deposits offered to commercial banks, to address the liquidity situation. On the interest rate front, with long-term rates in the United States slipping as investors sought safe haven instruments in the wake of financial market volatility, there was a widening of the TT/US 10-year Treasury yield from 161 basis points in December to 187 basis points as at January 25th 2016. However, there was simultaneously some compression at the shorter end of the yield curve, with the differential on 91-day securities narrowing from 84 to 69 basis points.

Taking into account the prevailing economic climate and the short-term outlook, at its January 2016 meeting the Central Bank’s Monetary Policy Committee decided to maintain the “Repo” rate at 4.75 per cent. The Bank will continue to carefully analyse domestic and international economic developments in its deliberations and decisions."


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