The Central Bank of T&T (CBTT) announced on August 26 that headline inflation, measured by the Retail Price Index, increased marginally to 1.40 per cent year-on-year (y-o-y) in July, from 0.80 per cent y-o-y in June. The increase in the food sub-index, the main driver of headline inflation, was largely responsible for the slight pick-up in headline inflation. Food inflation increased to 1.60 per cent in July (y-o-y) from 0.10 per cent in June. Core inflation (inflation ex-food prices) was unchanged in July from the previous month at 1.40 per cent. Figure 1, plots the y-o-y change in inflation over the last 12 months. On a monthly basis, headline inflation rose by 1.10 per cent in July after the 0.60 per cent increase in June.
The increase of the food price sub-index came as a result of higher y-o-y increases for the month of July versus one month ago in the sub-indices of breads and cereals (3.70 per cent from 2.30 per cent), fish (10.30 per cent from 5.40 per cent), fruits (24.60 per cent from 18.80 per cent), milk, cheese and eggs (7.30 per cent from 7.20 per cent) and oil and fats (5.60 per cent from 4.20 per cent). However, there were slower price increases in the sub-indices of meat (8.50 per cent from 10.50 per cent), vegetables (-9.50 per cent from -12.10 per cent) and sugar, jam, confectionery, etc, (6.0 per cent from 6.50 per cent).
The CBTT noted higher international agricultural commodity prices, such as wheat, were beginning to affect domestic food prices.
As previously mentioned, core inflation remained unchanged at 1.40 per cent in July. On a year-on-year basis, there were increases in the sub-indices of alcoholic beverages and tobacco (6.10 per cent from 5.40 per cent), clothing and footwear (1.90 per cent from -0.60 per cent), housing, water, electricity, gas and other fuels (1.20 per cent from 1.00 per cent) and hotels, cafes and restaurants (2.60 per cent from 1.90 per cent). In contrast, there were declines in the sub-indices of health (2.10 per cent from 2.40 per cent), recreation and culture (-0.20 per cent from 3.40 per cent) and furniture, household equipment and routine maintenance (0.90 per cent from 1.00 per cent).
During the third quarter of 2011, liquidity in the banking system rose, reflecting increased government
capital expenditure. For the first three weeks in August, commercial banks' excess reserves averaged $3.7 billion, up from $2.6 billion in July. As a result of the increased liquidity within the banking sector, inter-bank financing activity declined to a daily average of $18 million in August from $62 million in July.
Growth in private sector credit continued to improve, rising by 1.50 per cent in June following the 0.90 per cent increase in May. Consumer credit accelerated, increasing by 5.40 per cent in June from 4.60 per cent in May. Similarly, real estate mortgage lending remained strong, increasing by 10.04 per cent from 10.00 per cent in the previous period. Conversely, business lending continued its decline, falling by 1.45 per cent in June following a decline of 2.20 per cent in May.
Given the sluggish nature of the economy and low inflationary environment, the CBTT noted its accommodative monetary stance was appropriate. The bank maintained its benchmark rate, the repo rate at 3.00 per cent and left its other monetary policy instrument, the reserve requirement ratio, unchanged at 17.00 per cent.
Interest Rate Report and Outlook US$ Rates
The Standards & Poor's (S&P) 500 Index fell by 5.97 per cent over the last month, the FTSE 100 declined by 7.46 per cent and the DAX declined by 18.52 per cent. The sell-off in world equity markets was prompted by credit rating agency, S&P, downgrading the world's largest economy, the United States of America (US) one notch to AA+ from AAA on August 5. The US was also placed on a negative watch by S&P. In its rationale for the rating downgrade, S&P explained that its action stemmed from United States' high debt levels and lack of sufficient measures to stabilise the debt position.
Year-to-date, the S&P 500 Index is down 6.70 per cent, while the FTSE 100 and DAX fell by 10.30 per cent and 19.90 per cent, respectively. In spite of the downgrade of US debt, there was a typical flight to quality out of equity markets. Weak global economic data fuelled concerns about the global economic outlook and the growing risk of a recession. With lack of other suitable "safe-haven" financial assets, investors flocked to US Treasuries. The yields on the ten-year Treasury bond fell to 2.22 from 2.62 at the end of August. The longer 30-year bond also fell to 3.60 from 3.91 a month ago. Year-to-date, US treasuries had a return of 7.57 per cent as indicated by the US$ Treasuries Total Return Index, and over the last month the Index had a return of 0.90 per cent.
TT$ Rates
Excess liquidity within the banking system prompted a decline of local Treasury bill yields. The yields of 90-day bill fell to 0.73 per cent in August, from 0.93 per cent in July. During the latest auction held on July 18, the yields on the longer 182-day bill fell slightly in July to 1.06 per cent from 1.24 per cent in May.
Returns on short-term investments such as money market mutual funds remained flat, with investors earning an average of 1.96 per cent in July. Finally, given the lack of activity in the TT$ bond market, the yield curve remained relatively unchanged (Figure 2).
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.
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