Trinidad & Tobago holds rate as economy still sluggish

    The Central bank of Trinidad and Tobago (DBTT) kept its benchmark repo rate at 4.75 percent, unchanged since December 2015, but expressed concern over a further narrowing of the differential between short-term domestic debt and that of the U.S. amid a recent scaling back of financial markets' expectations for further Federal Reserve rate hikes this year.
     The central bank added inflation and credit growth in Trinidad and Tobago was very low, with both energy and non-energy data pointing to "continued sluggishness in the domestic economy."
     The economy of the twin-island close to Venezuela has been shrinking for the last two years as oil and gas exports have slumped. In the third quarter of 2016 its Gross Domestic Product fell by 10.8 percent year-on-year, shrinking for the eight consecutive quarter.
     Economic activity in the first quarter of 2017 remained subdued, the central bank said, with output from the oil and natural gas sector not yet recovering strongly.
     However, exploratory activity is up, with higher rig days and depth drilling being reported, leading to expectations of higher output.
     Inflation in the twin-island state has been contained since early 2016, with the annual rate falling to 1.7 percent in May from 1.8 percent in April
      Trinidad's dollar (TTD) fell sharply last year and was also caught up in the overall drop in emerging market currencies following the election of Donald Trump as U.S. president. 
      This year TTD has continued to decline, though at a much slower pace, and was trading at 6.76 to the U.S. dollar today, down 1 percent this year.
     The yield differential between TT and U.S. 10 three-month Treasury securities narrowed further to only 14 basis points by mid-July as a firmer U.S. economy and Fed rate hikes pushed up bond yields.
      The current yield differential compares with a differential of 94 basis points in June 2016, 67 points in January 2017, 43 points in March and 29 points in mid-May.
     In February the government issued an oversubscribed TTD1 billion US$1billion, 8-year, 4.10% bond, its second bond for fiscal 2016/17. The first TTD1billion bond was issued in December last year.

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

"At its meeting in July 2017, the Monetary Policy Committee (MPC) carefully reviewed international economic and financial developments and the evolution of the domestic economy thus far in 2017.

In July the International Monetary Fund (IMF) maintained its forecast for global economic growth of 3.5 per cent for 2017 as prospects generally remained solid in advanced and emerging economies. Expectations for growth have been lowered in the US but were revised upward in Japan, the Euro area and China. In the US, the firming economy and two increases in the Fed’s funds rate have led to rising bond yields in 2017, and consequently, narrowing differentials between the TT and US 91-day Treasury securities. By mid-July this differential measured 14 basis points, compared to 67 basis points at the end of January 2017. However, financial markets have now toned down their expectations of further hikes in the Fed’s funds rate in 2017.

Economic activity in Trinidad and Tobago remained subdued in the first quarter of 2017. Energy sector output has not yet begun to recover strongly, in particular oil and natural gas production. However, exploratory activity was up, with higher rig days and depth drilled being reported, and this is expected to boost energy sector going forward. Available indicators on sales, production and sectoral credit point to continued weakness in construction and distribution into the second quarter. 

Inflationary pressures have been well contained with the overall inflation rate measuring 1.7 per cent (year-on-year) in May 2017; both food and core inflation remained in the single digits at 1.8 and 1.7 per cent, respectively. Liquidity in the banking system is still comfortable, as commercial banks excess reserves averaged around $3.1 billion over May to July 2017, but there is evidence of some tightening in the context of rising Government domestic financing. Credit expansion is muted: in May 2017 credit to businesses granted by the consolidated financial system rose marginally by 0.3 per cent while loans to consumers eased to 4.5 per cent and lending for real estate mortgages was stable at 4.4 per cent.

In its deliberations, the MPC noted with concern the narrowing of the differential between the Trinidad and Tobago and US Treasury three-month rates, while also considering the reduced market expectations for further increases in the Fed’s funds rate in 2017. At the same time, inflation and credit growth were very low, while both energy and non-energy statistics pointed to continued sluggishness in the domestic economy. In light of these factors, the MPC decided to maintain the repo rate at 4.75 per cent. The Bank will continue to carefully monitor and analyze international and domestic developments in its deliberations.

The next Monetary Policy Announcement is scheduled for September 29, 2017. 

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