The Central Bank of T&T (CBTT) announced on June 24 that headline inflation, measured by the Retail Price Index, slowed to 3.90 per cent year-on-year (y-o-y) in the month of May, down from 6.40 per cent in April. The CBTT noted the marked slowdown in headline inflation was attributable to the sharp decline in food price inflation, the main driver of headline inflation. The food sub-index fell to 8.20 per cent in May (y-o-y) from 15.00 per cent in April. Core inflation (inflation ex-food prices) remained unchanged at 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 fell by 0.40 per cent in May, following an increase of same magnitude in April. The decline of the food price sub-index came as a result of lower y-o-y price increases for the month of May versus one month ago in the sub-indices of fish (7.60 per cent from 12.10 per cent), vegetables (5.40 per cent from 18.50 per cent), milk, cheese and eggs (10.50 from 12.50 per cent), sugar, jam, confectionary, etc. (5.30 per cent from 5.60 per cent) and fruits (19.70 per cent from 26.50 per cent).
However, there were increases in the sub-indices of meat (12.00 per cent from 9.90 per cent), bread and cereals (1.70 per cent from 1.30 per cent) and oils and fats (1.90 per cent from -1.20 per cent).
Core inflation remained unchanged at 1.30 per cent from the previous month. On a year-on-year basis, there was a slight decrease in the sub-index of alcoholic beverages and tobacco (5.80 per cent from 6.00 per cent), while the health sub-index increased marginally (2.20 per cent from 2.00 per cent). The other indices remained unchanged for the same period.
Tighter liquidity conditions
Liquidity absorption measures undertaken by the Central Bank and lower net domestic fiscal injections helped reduce excess liquidity within the financial system. In June, the CBTT withdrew approximately $125 million from the financial system via the sale of government securities and dealings in the foreign exchange markets. The bank noted tighter liquidity conditions caused some commercial banks to use inter-bank lending and the repo window at CBTT, to meet short-term funding requirements. Commercial bank's excess reserve balances at the Central Bank averaged $1.30 billion in June, from $2 billion in December.
Private sector credit conditions continue to show signs of a weak recovery, with the rate of decline slowing to 0.80 per cent from 1.40 per cent in March. Consumer credit and real estate mortgage lending remained the main drivers of the improvement in credit growth, increasing by 6.70 per and 8.80 per cent, respectively. Conversely, business lending remained stunted, declining by 5.90 per cent, for the eighteenth consecutive month. Within the financial sector, commercial bank lending to the private sector increased by 1.60 per cent in April (year-on-year), while credit by non-bank financial institutions decreased by 13.30 per cent. The bank remains cautious about the outlook for domestic inflation, given the price increases of key agricultural commodities, such as corn and soya on the international market. The CBTT has maintained its benchmark rate, the Repo rate, at 3.25 per cent and has also left its' other monetary policy instrument, the Reserve Requirement Ratio, unchanged at 17.00 per cent.
Interest Rate Report and Outlook
USD rates
The Standard & Poor's 500 Index fell by 2.11 per cent over the last month, the FTSE 100 declined by 1.22 per cent, amidst concerns regarding the slowdown in the global economy, while the DAX increased by 1.89 cent. Year-to-date, the indices were up 4.72 per cent, 0.26 per cent, and 6.14 per cent, respectively. The yields on the ten-year Treasury increased slightly to 3.13 from 3.07 at the end of May. The longer 30-year note also increased to 4.43 from 4.23 a month ago. Year-to-date, US treasuries had a positive return of 2.55 per cent, as indicated by the US$ Treasuries Total Return Index, and over the last month, the index fell by 0.16 per cent. Locally, US Dollar money market funds continue to offer investors competitive returns and offered investors a return of 2.55 per cent in June.
TTD rates
The Central Bank's success in mopping up excess liquidity in the banking system prompted the three month Treasury Bill Yield to increase to 0.97 per cent, from 0.68 per cent in May, during the latest auction for bills issued on June 22. Returns on short-term investments, such as money market mutual funds, have flattened out over the past year; on average investors will earn 2.29 per cent on their investments, as opposed to 2.79 per cent earned in June 2010.
TTD yield curve
The increase in short-term Treasury Bill yields resulted in some movement in the shorter end of the T&T Yield Curve. However, the longer end of the Yield Curve remained relatively unchanged.
Tenor (Yrs)
Avg Yield
1.09
1.91%
3.84
3.48%
7.35
4.67%
10.26
5.37%
19.44
6.21%
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.