The Central Bank of T&T (CBTT) announced on March 25 that headline inflation, measured by the Retail Price Index, slowed to 10.70 per cent year on year (year-on-year) in the month of February, down from 12.50 per cent in January. The food sub-index, the main driver of headline inflation, slowed to 25.10 per cent in February (y-o-y) down from 30.90 per cent in January. Core inflation (inflation ex-food prices) inched upwards to 2.80 per cent in February from 2.60 per cent in the previous month. Figure 1 plots the monthly change in inflation over the last 12 months. On a monthly basis, headline inflation fell by 0.70 per cent in February following an increase of 1.10 per cent in January. The fall in the food price sub-index was led by lower y-o-y price increases for the month of February versus one month ago in the sub-indices of meat (9.90 per cent from 10.20 per cent), vegetables (33.30 per cent from 51.00 per cent), and sugar, jam, and confectionery (3.70 per cent from 3.90 per cent).
There were, however, increases in the sub-indices of bread and cereals (0.20 per cent from -0.40 per cent), fish (7.70 per cent from 7.20 per cent), fruits (33.30 per cent from 26.30 per cent), milk cheese, and egg (11.50 per cent from 11.30 per cent), and oils and fats (-2.60 per cent from -3.10 per cent). Core inflation rose marginally to 2.80 per cent in February from 2.60 per cent in January, following an increase in the sub-index of clothing and footwear (-0.20 per cent from -1.70 per cent), tempered by a y-o-y decline in the alcoholic beverages and tobacco (6.10 per cent from 6.20 per cent) sub-index. The remainder of the core inflation index remained unchanged from the previous month. Private sector credit
As a result of subdued demand in the local economy, private sector credit by the consolidated financial system continued to decline. Over the past 12 months, private sector credit fell by 2.30 per cent in January 2011. The bank noted that of the three major categories of private sector credit, growth in consumer lending rose by a robust 3.40 per cent following an increase of 4.20 per cent in the previous month, while credit to businesses declined by 5.90 per cent in January from a decline of 7.20 per cent in December 2010. Real estate mortgages remained strong, growing by 7.60 per cent in January following a 9 per cent increase in the previous month. Excess commercial bank balances at the Central Bank averaged $1.6 billion in March, up from $1.4 billion in February, compared to $2 billion towards the end of last year. This result was on the heels of liquidity absorption measures by the Central Bank over the last couple months, coupled with lower net fiscal injections. The bank noted that net fiscal injections for the first six months of the fiscal year were 15 per cent lower than the corresponding period in the previous fiscal year.
The bank noted that inflation risks are likely to remain on the upside in the coming months as a result of a sharp increase in global commodity prices in particular soft commodities, such as wheat, corn and sugar. These price increases have not begun to impact local food prices, but is expected to in the coming months. However, the bank noted that, the existence of spare capacity could help offset the risk of rising inflation. Faced with the arduous task of stimulating growth, especially in the non-energy sector, the CBTT has lowered its benchmark rate–the repo rate–over the past few months to 3.25 per cent.
The bank noted that the reductions are still working their way through the financial system as commercial banks adjust their lending rates. Against this backdrop, the CBTT has decided to leave their repo rate unchanged. The CBTT also left its other monetary policy instrument, the reserve requirement ratio, unchanged at 17 per cent.
Interest Rate Report and Outlook US$ Rates
The Standards & Poor's 500 Index rose 1.49 per cent over the last month, the FTSE 100 rose 0.45 per cent, while the DAX fell 0.1.38 per cent. Year-to-date, the indices were up 5.42 per cent, 1.06 per cent, and 3.03 per cent, respectively. This has prompted yields on the ten-year Treasury to rise to 3.49 per cent from 3.39 per cent at the end of February, as investors poured back into the stock market encouraged by higher expected earnings. The longer 30-year note rose to 4.52 per cent from 4.48 per cent a month ago. Year-to-date, US treasuries had a negative return of 0.07 per cent, as indicated by the US$ Treasuries Total Return Index, over the last month the index fell by 0.55 per cent. Year-on-year, the index was up 4.62 per cent. Locally, US dollar money market mutual funds still offered investors one of the highest rates of return. On average, US dollar money market mutual funds are offering yields of 1.86 per cent to investors.
TT$ rates
The Central Bank's success in mopping up some of the excess liquidity in the banking system has prompted the three-month Treasury Bill Yield to increase to 0.40 per cent, from a historic low of 0.28 per cent, during the latest auction for bills issued on March 22. Figure 2 illustrates the movement in the 91-day Treasury Bill over the last year. Yield on the longer 182 Treasury Bill also inched upwards to 0.55 per cent at the latest auction on March 14, up from a historic low of 0.48 per cent, as illustrated in Figure 3. Returns on short-term investments, such as money market mutual funds, have flattened out over the past year; on average, investors will earn 2.24 per cent on their investments.
TT$ yield curve
The shorter end of the T&T Bond Yield Curve (Figure 4) remained depressed as yields remain at low levels as investors flocked to the safety of Government short-term instruments, coupled with excess liquidity in the system. The longer end of the curve remained relatively unchanged from the previous month. The benchmark yields in constructing the curve were: 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.