The Central Bank has announced the fourth consecutive increase in the repo rate. The decision to increase it by 25 basis points to 3� per cent was made at the March meeting of the Central Bank's Monetary Policy Committee. There will also be a continuation of the agressive programme to absorb excess liquidity to strengthen the impact high interests rates will have throughout the financial system.
These decisions were based on recent forward guidance from the US Federal Open Market Committee (FOMC) on the medium-term path of US monetary policy, the potential for higher domestic inflation in the medium term and the relatively positive growth outlook for 2015.
Based on recent information from the FOMC, markets are expecting the first increase in the US Federal Reserve funds rate to occur between July and September and for US policy rates liely to rise at a gradual pace after that.
The Central Bank said: "This normalization of US monetary policy has implications for portfolio capital outflows and foreign exchange demand in Trinidad and Tobago, especially since returns on US dollar assets remain more attractive than TT dollar assets.
"By mid-March 2015, the TT$-US$ differential on benchmark 10-year Treasuries had narrowed to 64 basis points, from 87 basis points since the end of January 2015. Higher domestic interest rates are necessary to enhance returns on TT$-denominated assets, helping to curb portfolio capital movements out of Trinidad and Tobago."
In January the MPC noted that the domestic economy appeared to be approaching full capacity. The Central Bank said the situation remains unchanged, although headline inflation slowed for the third consecutive month in February to just over 6 per cent from 9 per cent in November 2014.
The slowdown in food inflation was due to higher food supply and favourable weather conditions and it contributed to the deceleration in headline inflation.
However, the Central Bank expects this easing in headline inflation to be short lived, as inflationary pressures are expected to pick up during the rest of the year due to a number of factors.
"Growth of consumer credit remains robust, increasing by nearly 8 � per cent in January 2015, suggesting consumers are still willing to spend despite negative sentiment surrounding falling oil prices," the bank said.
Current and expected settlement of wage negotiations for teachers, civil servants and other public sector workers with considerably large retroactive payments and salary increments will boost consumer spending and further stoke inflationary pressures."
Government's spending on its capital programme was higher by 7 per cent in the first four months of the financial year compared to the corresponding period one year ago.
In the final quarter of 2014, economic growth was buoyed by further positive momentum in the non-energy sector, even as activity in the energy sector was marred by maintenance work, the Central Bank reported.
"Discussions with upstream energy producers suggest there was no carry-over of maintenance-related activity into early 2015 and the start-up of BGTT's Starfish well is expected to provide a fillip to upstream gas production in 2015. Both natural gas and crude oil output were higher by almost 2 per cent and 12 � per cent, respectively, in January 2015. The near-term outlook for the non-energy sector is for continued steady performance, albeit at a slower pace than in 2014."
The bank said its aggressive liquidity management programme contributed to a significant reduction in commercial banks' excess reserves in the first quarter of the year. It said tighter liquidity levels prompted inter-bank activity in February for the first time since 2013.
Efforts to keep banking system liquidity at an appropriate level will be maintained to support the monetary transmission of increases in the Repo rate. The Central Bank added that it is prepared to "further position its monetary policy stance to address any challenges that may arise in the coming months."
The Central Bank will make its next Monetary Policy Announcement on May 29.