For the first time in four years, the Central Bank has relaxed its accommodative monetary policy stance and has increased the repo rate by 25 basis points to three per cent.In a statement yesterday, the Central Bank said the decision was made at the September meeting of its Monetary Policy Committee (MPC) and is effective immediately."This increase is now necessary to pre-empt a potential rise in inflationary pressures and to mitigate higher portfolio outflows," the bank said.
The Central Bank had adopted an accommodative monetary stance in the past to help stimulate economic growth and encourage business and consumer lending. That had included holding the repo rate at an historical low of two-and-three-quarter per cent since September 2012.The bank said its decision was based on several facts, include "forward guidance from the Federal Open Market Committee (FOMC)" on September 17.
"The communication from the FOMC suggested the Federal Reserve's monetary policy actions would come sooner than anticipated. The Fed is now expected to end its quantitative easing programme before the end of 2014 and gradually increase its policy interest rate around the middle of 2015.
"In anticipation of these monetary actions, yields on US Treasury securities jumped almost immediately, making US dollar assets even more attractive relative to TT dollar assets. It has become necessary to enhance the appeal of TT dollar assets which have lower returns in relation to US dollar assets, as returns on the latter will be bolstered when the Fed's expected monetary policy actions are realised," the Central Bank said.
Another determining fact was headline inflation which accelerated last month. The bank said a "sharp uptick in food prices pushed headline inflation up to seven-and-a-half per cent in August 2014 from three per cent in June 2014."The statement continued: "Looking ahead, higher public spending through the expansionary 2014/2015 Budget is likely to add to already elevated liquidity levels (currently around $7 billion), and potentially push up inflation in the coming year.
"Core inflation, which has remained low and stable for some time, could also accelerate as a result of sustained and strong growth in consumer loans and real estate mortgages.Consumer loans rose by six per cent in July 2014, mostly for purchases of motor vehicles, home improvement/renovation and credit cards. Real estate mortgage lending maintained its double-digit rate of increase, rising by over 11 per cent in July 2014."
The bank said the non-energy sector had registered slow but steady growth for 11 consecutive quarters but there had been ongoing supply disruptions in the energy sector which slowed the overall pace of economic recovery. In addition, local sales of cement and sales of new cars–proxy indicators of activity in the construction and distribution sectors–expanded strongly by almost 20 per cent and nearly ten per cent, respectively, in the first half of the year.
The next monetary policy announcement is scheduled for November 28.