Bourse Se­cu­ri­ties Ltd

The Cen­tral Bank of T&T (CBTT) an­nounced on May 27 that head­line in­fla­tion, mea­sured by the Re­tail Price In­dex, de­clined to 6.40 per cent year-on-year (y-o-y) in the month of April, down from 9.40 per cent in March. The CBTT not­ed the de­cline in head­line in­fla­tion was main­ly due to the "base ef­fect." This was pri­mar­i­ly caused by a sharp spurt in the In­dex of Re­tail Prices in April 2010 and this el­e­vat­ed lev­el, which forms the base for the year-on-year com­par­i­son, led to a slow­er an­nu­al rate of growth in the In­dex in April 2011.

The food sub-in­dex, the main dri­ver of head­line in­fla­tion, de­clined sharply to 15.0 per cent in April (y-o-y) from 21.30 per cent in March. Core in­fla­tion (in­fla­tion ex-food prices) fell to 1.30 per cent in April from 2.70 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 rose by 0.40 per cent in April, fol­low­ing two con­sec­u­tive months of de­cline in Feb­ru­ary and March.

Fall in food prices

The fall in the food price sub-in­dex was at­trib­ut­able to low­er y-o-y price in­creas­es for the month of April ver­sus one month ago in the sub-in­dices of veg­eta­bles (18.50 per cent from 31.30 per cent), fruits (26.50 per cent from 31.40 per cent) and meat (9.90 per cent from 10.70 per cent). There were, how­ev­er, in­creas­es in the sub-in­dices of bread and ce­re­als (1.30 per cent from 0.80 per cent), fish (12.10 per cent from 7.30 per cent) and sug­ar, jam, con­fec­tioner­ies, etc. (5.60 per cent from 4.40 per cent).

The sub-in­dex of milk, cheese and eggs re­mained un­changed from March at 12.50 per cent.

Core in­fla­tion fell to 1.30 per cent in April from 2.70 per cent in March, fol­low­ing a de­crease in the sub-in­dices of recre­ation and cul­ture (3.40 per cent from 14.00 per cent), al­co­holic bev­er­ages and to­bac­co (6.00 per cent from 6.20 per cent), and health (2.00 per cent from 3.70 per cent).

There were slight in­creas­es in the sub-in­dices of hous­ing, wa­ter, elec­tric­i­ty, gas and oth­er fu­els (1.00 per cent from 0.70 per cent), ed­u­ca­tion (2.60 per cent from 1.90 per cent), fur­nish­ings, house­hold equip­ment and rou­tine main­te­nance (1.00 per cent to 0.60) and ho­tels, cafes and restau­rants (1.90 per cent from 0.40 per cent). The cloth­ing and footwear sub-in­dex re­mained un­changed for the pe­ri­od.

Re­duced liq­uid­i­ty

Liq­uid­i­ty ab­sorp­tion mea­sures un­der­tak­en by the Cen­tral Bank and low­er net do­mes­tic fis­cal in­jec­tions re­sult­ed in a de­cline of ex­cess bank bal­ances at the Cen­tral Bank to $1.4 bil­lion in May from $1.7 bil­lion in March. Ad­di­tion­al­ly, in May, $1 bil­lion was with­drawn from the fi­nan­cial sys­tem ow­ing to Cen­tral Bank's ac­tions in gov­ern­ment se­cu­ri­ties and for­eign ex­change mar­kets. As a re­sult of sub­dued de­mand in the lo­cal econ­o­my, pri­vate sec­tor cred­it by the con­sol­i­dat­ed fi­nan­cial sys­tem re­mains weak.

The rate of de­cline in pri­vate sec­tor cred­it slowed to 1.60 per cent in March from 2.30 per cent in Jan­u­ary, on a year-on-year ba­sis. The bank not­ed of the three ma­jor cat­e­gories of pri­vate sec­tor growth, con­sumer cred­it con­tin­ued to ac­cel­er­ate and ex­pand­ed for the sixth con­sec­u­tive month, in­creas­ing by 5.10 per cent from 3.30 per cent in Jan­u­ary. Re­al es­tate mort­gages re­mained strong, grow­ing by 8.40 per cent in March fol­low­ing a 7.60 per cent in­crease in Jan­u­ary.

Busi­ness lend­ing re­mained slug­gish, de­clin­ing by 5.40 per cent, fol­low­ing a 5.70 per cent de­crease in Jan­u­ary. 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. The Bank not­ed un­der­ly­ing in­fla­tion­ary pres­sures ap­pear well con­tained for the time be­ing.

US$ rates

The Stan­dards & Poor's 500 In­dex rose 2.85 per cent over the last month, the FTSE 100 rose 2.26 per cent, while the DAX rose 4.73 per cent re­flect­ing im­proved in­vestor con­fi­dence due to cor­po­ra­tions' first quar­ter fi­nan­cial re­sults ex­ceed­ing an­a­lysts' pro­jec­tions. Year to date, the in­dices were up 6.96 per cent, 1.32 per cent, and 5.35 per cent, re­spec­tive­ly. The yields on the ten-year Trea­sury fell to 3.07 from 3.28 per cent at the end of April.

The longer 30-year note al­so fell to 4.23 from 4.39 a month ago. Year to date, US trea­suries had a pos­i­tive re­turn of 2.72 per cent, as in­di­cat­ed by the US$ Trea­suries To­tal Re­turn In­dex, over the last month the in­dex rose by 1.55 per cent. Lo­cal­ly, US$ mon­ey mar­ket funds con­tin­ue to of­fer in­vestors high­er re­turns, on av­er­age US$ mon­ey mar­ket mu­tu­al funds of­fered in­vestors a re­turn of 2.57 per cent in April.

TT$ Rates

The Cen­tral Bank's suc­cess in mop­ping up ex­cess liq­uid­i­ty in the bank­ing sys­tem via the Na­tion­al In­sur­ance Prop­er­ty De­vel­op­ment Com­pa­ny Ltd (Nipdec) bond auc­tion and for­eign ex­change sales, prompt­ed the three-month Trea­sury Bill Yield to in­crease to 0.68 per cent, from 0.47 per cent in April, dur­ing the lat­est auc­tion for bills is­sued on May 18. Yield on the longer 182 Trea­sury Bill al­so in­creased to 1.24 per cent at the lat­est auc­tion on May 23 up from 0.55 per cent in March.

Re­turns on short-term in­vest­ments, such as mon­ey mar­ket mu­tu­al funds, have flat­tened out over the past year; on av­er­age in­vestors will earn 2.44 per cent on their in­vest­ments, as op­posed to 2.84 per cent earned in April 2010. On May 17, Nipdec auc­tioned the first pub­lic bond is­sue for the year. Nipdec is­sued a $750 mil­lion 6.55 per cent fixed rate bond due in 2030. The bond was 2.65 times over­sub­scribed and was is­sued at a yield of 6.25 per cent.

TT$ yield curve

The short­er end of the T&T Bond Yield Curve (Fig­ure 2) has seen some move­ment due to the in­crease in Trea­sury Bill yields, the longer end of the curve re­mained rel­a­tive­ly un­changed from the pre­vi­ous month.

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.

Tenor

(years)

Mar­ket

Av­er­age Yeild

1.17

1.83%

3.92

3.47%

7.43

4.60%

10.35

5.20%

19.52

6.13%