The Central Bank of T&T (CBTT) announced on July 29 that headline inflation, measured by the Retail Price Index, drastically slowed to 0.80 per cent year-on-year (y-o-y) in June, down from 3.90 per cent in May. The CBTT noted the significant slowdown in headline inflation was attributable to the "base effect."
This was primarily caused by a sharp spurt in the Index of Retail Prices in June 2010. This elevated level which forms the base for the year-on-year comparison, led to a slower annual rate of growth in the Index for June 2011. The food sub-index, the main driver of headline inflation, fell drastically to 0.10 per cent in June (y-o-y) from 8.20 per cent in May. Core inflation (inflation ex-food prices) increased marginally to 1.40 per cent (y-o-y) in June from 1.30 per cent in May. Figure 1 plots the year-on-year change in inflation over the last 12 months. On a monthly basis, headline inflation rose by 0.60 per cent in June after decline of 0.40 per cent in the previous month (Figure 2).
Higher commodity prices
The decline of the food price sub-index came as a result of lower y-o-y price increases for the month of June versus one month ago in the sub-indices of meat (10.50 per cent from 12.00 per cent), fish (5.40 per cent from 7.60 per cent), vegetables (-12.10 per cent from 5.40 per cent), fruits (18.80 per cent from 19.70 per cent) and milk, cheese and eggs (7.20 per cent from 10.50 per cent). However, there were increases in the sub-indices of bread and cereals (2.30 per cent from 1.70 per cent), oil and fats (4.20 per cent from 1.90 per cent) and sugar, jam, confectionery, etc, (6.50 per cent from 5.30 per cent). The bank noted that despite favourable weather conditions locally and higher domestic crop yields, the impact of higher international commodity prices has started to affect local food prices. The increase in local prices for bread, eggs and edible oils were attributable to the higher prices of grains and dairy products. Core inflation increased marginally in June to 1.40 per cent from 1.30 per cent in the previous month. On a year-on-year basis, the sub-index of health increased slightly (2.40 per cent from 2.20 per cent), while there was a slight decrease in the sub-index of alcoholic beverages and tobacco (5.40 per cent from 5.80 per cent). The other sub-indices remained unchanged over the same period.
High liquidity
Liquidity absorption measures undertaken by the Central Bank and lower net domestic fiscal injections helped reduce excess liquidity within the financial system. For the period January to June 2011, commercial banks' excess reserve balances held at the Central Bank averaged $1.3 billion versus the $2 billion average during the corresponding period in 2010. The bank noted that as a result of tighter liquidity conditions, some commercial banks utilised the inter-bank lending market and the 'repo' window at the CBTT to meet their short-term funding requirements. Growth in private sector credit continued to improve, increasing by 0.90 per cent in May following a decline of 0.78 per cent in April. Consumer credit continued its upward trajectory, increasing by 4.70 per cent in May from 6.73 per cent in April. Similarly, real estate mortgage lending remained strong increasing by 10.10 per cent from 8.76 per cent in the previous period. Conversely, business lending remained stunted, declining by 2.20 per cent following a decline of 5.90 per cent in May. Given the sluggish nature of the economy and the low inflationary environment, the CBTT noted that there was room in its monetary policy to stimulate growth. As such, the bank lowered its benchmark rate, the repo rate by 25 basis points to a historic low of 3.00 per cent, in a bid to encourage private sector economic activity.
Interest Rate Report and Outlook
US$ rates
The Standard & Poor's 500 Index fell by 3.93 per cent over the last month, the FTSE 100 and DAX declined by 2.91 per cent and 2.95 per cent, respectively. The decline in equity markets reflected concerns over the European debt crisis and uncertainty regarding the US government's ability to raise the government's debt ceiling. Failure of the US government to raise its debt ceiling could have resulted in the world's largest economy defaulting on their loans. On August 2, the US government passed legislation to increase the debt cap, thus avoiding a possible default on their bonds. However, while the default was averted, the threat of a possible downgrade of US sovereign credit ratings remains. These sovereign credit issues increased volatility within international equity markets. Year to date, the S&P 500 Index was down 2.90 per cent, while the FTSE 100 and DAX fell by 4.06 per cent and 2.64 per cent, respectively. The heightened volatility within international equity markets prompted a flight to quality. The yields on the ten-year Treasury bond fell to 2.62 from 3.13 at the end of July. The longer 30-year bond also fell to 3.91 from 4.43 a month ago. Year to date, US treasuries had a return of 4.52 per cent as indicated by the US$ Treasuries Total Return Index, and over the last month the Index had a return of 1.90 per cent.
TT$ rates
The yields on three-month local Treasury bills fell marginally to 0.93 per cent in July, from 0.97 per cent in June. Similarly, the yields on the longer 182-day bill fell slightly in July to 1.06 per cent from 1.24 per cent in May during the latest auction held on July 18. Returns on short-term investments, such as money market mutual funds remained flat, with investors earning an average of 2.29 per cent in June. Finally, given the lack of activity in the TT$ bond market, the yield curve remained relatively unchanged (Figure 3).
Note: The BSL yield curve was constructed using actual and empirical trading and indicative data, plotting the data points and interpolating to develop a spectrum of yields across the curve. Actual short-term rates were obtained by using the latest Treasury Bill yields.