Higher prices are coming. That's the prediction from Central Bank Governor Jwala Rambarran who said headline inflation is of concern because it has been increasing within the last year due to "food price inflation which remained in the double-digit range for the sixth successive month in December 2014."Headline inflation stood at 8.5 per cent in December 2014.Rambarran was speaking yesterday at the bank's monetary policy announcement news conference at the Central Bank in Port-of-Spain.
He said the repo rate will increase to 3.5 per cent, which is justified since signs are showing that T&T's economy is approaching full capacity.
"Full capacity is a term that the economists use to basically indicate that much of the resources are being used up and it would eventually spill over into rising prices, whether in terms of wage rates, whether in terms of higher salaries, whether you are paying more construction items cement, steel. whether you eventually end up paying more for locally produced vegetables.
"It generally means that there is so much demand in the system, we do not have enough supply to meet that demand therefore, the only way you can get an adjustment is through higher prices."Rambarran said the Central bank has a programme of intensified open market operations in place "to aggressively remove excessive liquidity from the banking system in coming months, in order to support our repo rate adjustments."
Referring to the decision to absorb labour from Cepep to the private sector to address the labour shortage, Rambarran said: "We understand that with the business community there are discussions underway to make some transitions there. What that would simply mean is a reallocation from the public sector the private sector.
"At the same time, you do have the business community (saying) that there are shortages of labour. We've seen that reflected in the level of inward migration that has been taking place over the last few years. With T&T remaining a pretty strong and resilient economy we've seen persons come not only from the Caribbean, but from outside of the Caribbean, to work in T&T as they look for better opportunities."
Addressing complaints about the method of allocating US currency, Rambarran said the Central Bank was justified. He said in the new arrangement there are eight institutions which are banks and four which are non-banks."What we did do was that there were two entities in particular, that were not part of the allocation system before–Massy Finance and Development Finance Ltd. We decided as authorised dealers they should be part of the system," he explained.
Rambarran said there is no political pressure when it comes to how much foreign currency the banks puts into the T&T market."The Central Bank can give the assurance to the business community that we are making larger and more frequent interventions. We said that we plan to clear the unsatisfied demand and clear some of the precautionary demand that has been brought forward.
"Therefore you can look forward to further easing over the coming months. Based on the data that we've seen coming in over the last month, substantial businesses have been receiving foreign exchange. You may not have received all that you've wanted but the process has started. The tensions are beginning to ease," he said. Earlier this week, the Central Bank sold US$400 million to the banking system–its largest foreign exchange intervention made by Central Bank in a single month to date.
Despite selling US$ 1.7 billion to the banking system in 2014, significant unsatisfied demand carried over into the start of this year.