Trinidad and Tobago's central bank raised its benchmark repurchase rate by 25 basis points for the sixth consecutive time to 4.25 percent but said the rate still remains below its longer term average and it "views the monetary policy stance as supportive to economic growth."
The Central Bank of Trinidad and Tobago has now raised its rate by a total of 150 basis points since embarking on its tightening campaign in September 2014. In 2015 it has raised the rate 100 points.
The main factor behind the decision to raise the rate was the recent forward guidance by the U.S. Federal Reserve regarding the start of a normalization of monetary policy, followed by the potential for core inflation pressures to pick up over the next few months and finally the weaker-than-expected growth in the non-energy sector in the first half of this year.
"Despite slower-than-expected growth in the non-energy sector in the first half of 2015, the MPC (Monetary Policy Committee) anticipates a respectable performance in the non-energy sector in the second half of 2015," the central bank said.
Referring to this week's statement by the Fed, the central bank said it had "hinted the U.S. labor market is reaching a position where a rate hike could be possible this year,"and over the past few months an improving U.S. economy have led to rising yields on 10-year Treasuries.
As a result, the differential between Trinidad and Tobago and U.S. 10-year bonds has narrowed substantially to 69 basis points at the end of July from 82 points at the end of May.
"Higher domestic rates are necessary to enhance yields of TT$ instruments to mitigate potential capital outflows," the central bank said.
In addition, the central bank said rising inflationary pressures remain a concern, with pressures expected to pick up in the rest of this year due to a possible rise in food inflation, strong consumer credit, public sector wage agreements that is likely to lift consumer spending and higher public spending in the remaining four months of fiscal 2015.
The central bank said headline inflation was steady at just over 5.50 percent in June while core inflation slowed marginally to just below 2 percent.
The Central Bank of Trinidad and Tobago issued the following statement:
"At its July 2015 meeting, Central Bank’s Monetary Policy Committee (MPC) agreed to
raise the ‘Repo’ rate for a sixth consecutive time by 25 basis points to 4 ¼ percent. The MPC based
its decision on three factors. The first and most influential factor was recent forward guidance by
the US Fed on the start of normalization of U.S. monetary policy. The second factor was the
potential for domestic core inflationary pressures to pick up over the next few months. The third
factor upon which the MPC deliberated was weaker-than-anticipated growth in the non-energy
sector in the first half of 2015.
Since the previous meeting of the MPC, uncertainty related to the Greek debt crisis and the sharp
correction in Chinese equity markets dominated sentiment in global financial markets. Even though near
term risks from these events appear to have dissipated somewhat for now, risks associated with the timing
of the first increase in the US Fed funds rate still persist. In her mid-July 2015 testimony to Congress, US
Fed Chairwoman Janet Yellen reiterated the Fed remains on track to raise rates this year, as long as the
U.S. economy evolves as expected. At its July 28-29th meeting, the FOMC hinted the U.S. labor market is
reaching a position where a rate hike could be possible this year. Over the past few months, improving
U.S. economic conditions and rising expectations for a Fed rate increase have led to increasing yields on
the benchmark 10-year US Treasury. As a result, the interest rate differential between TT – US 10- year
Treasuries narrowed substantially to 69 basis points at the end of July 2015 from 82 basis points at the
end of May 2015. Higher domestic rates are necessary to enhance yields of TT$ instruments to mitigate
potential capital outflows.
Locally, rising inflationary pressures remain a concern for the MPC. Headline inflation held steady at
just over 5 ½ percent in June 2015, while core inflation slowed marginally to just below 2 percent.
However, the MPC expects inflationary pressures to pick up in the remaining months of 2015 due to a
number of factors:
• Food inflation accelerated for the first time in 2015 spurred by rising input costs (specifically
poultry) and falling supply associated with the outbreak of a pest in the Dominican Republic, a
major source market for fruits and vegetables. In June 2015, food inflation rose to 9.7 percent.
The advent of the rainy season raises the possibility of flooding and may lead to additional disruptions to domestic agricultural supply, further pushing up food inflation, which drives
headline inflation.
• Consumer credit continues to grow at a fairly strong pace, increasing by 7 ½ percent in May 2015.
Recently concluded public sector wage agreements are expected to lift consumer spending and
inflationary pressures.
• Central Government maintained an expansionary fiscal stance in the first eight months of FY2015.
Capital expenditure, in particular, increased by nearly 9 ½ percent due to a pick-up in the pace of
project implementation as well as the settlement of some outstanding commitments. The MPC
expects public spending to ramp up in the remaining four months of fiscal 2015, boosted by higher
public sector wages and ongoing capital infrastructure projects ahead of the general elections.
The Repo rate increased by 150 basis points since September 2014, but this is still below its
longer term average. The MPC, therefore, views the monetary policy stance as supportive to economic
growth. Despite slower -than- expected- growth in the non-energy sector in the first half of 2015, the
MPC anticipates a respectable performance in the non-energy sector in the second half of 2015.
With liquidity levels falling to a daily average of $3.2 billion over the past three months (May – July
2015), the MPC agreed to continue with an aggressive programme to absorb excess liquidity and
strengthen the impact of higher interest rates throughout the financial system. Commercial banks’ median
prime lending rate increased to 8 ¼ percent in July 2015 from 8.00 percent in May 2015. Commercial
banks are expected to further increase their interest rates in coming months.
The next Monetary Policy Announcement is scheduled for September 25th 2015."
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