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When, and by how much, will interest rates go up?
Last week, in an article headlined “Is the era of cheap money coming to an end?” it was predicted that stronger inflationary impulses in the latter half of 2014 would put pressure on the Central Bank to increase the repo rate from its historic low of 2.75 per cent later this year.
That prediction was partly based on analysis in the May 2014 Monetary Policy Report in which the Central Bank said that record low interest rates in T&T—at least since September 2012 when the repo rate was reduced to 2.75 per cent—had encouraged a rise in consumption, “as evidenced by robust growth in consumer borrowing and sharp increases in sales figures for high-priced durables such as motor vehicles.
“The faster pace of economic growth coupled with rising consumption and the threat of higher international agricultural prices, has the potential to stoke inflationary pressures over the coming year.”
Crucially, the Central Bank also said while it was committed to providing the necessary support to the economic recovery that is underway, it “will have to start giving greater weight to managing inflationary expectations in its monetary policy deliberations.”
The Central Bank’s shift in emphasis from attempting to use interest rates to stimulate the economy to starting to give “greater weight to managing inflationary expectations” is a deliberate signal to the country that it should prepare for higher interest rates.