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Friday, July 25, 2025

Core inflation remains stable

...Cen­tral Bank main­tains re­po rate at 2.75 per cent

by

20140726

More than 80 per cent of firms ex­pect to in­crease their pro­duc­tion lev­els in the next six months.More firms are con­fi­dent the lo­cal econ­o­my would im­prove in the next 12 months than the first Busi­ness Con­fi­dence Sur­vey con­duct­ed by the Arthur Lok Jack Grad­u­ate School of Busi­ness.Those are two of the high­lights of the Cen­tral Bank's mon­e­tary pol­i­cy an­nounce­ment re­leased yes­ter­day.Be­low is the full state­ment is­sued by the bank:

With core in­fla­tion­ary pres­sures well con­tained, the Cen­tral Bank is main­tain­ing the 're­po' rate at 2.75 per cent, which re­mains sup­port­ive of cur­rent eco­nom­ic con­di­tions. How­ev­er, as the pace of eco­nom­ic ac­tiv­i­ty strength­ens, the Cen­tral Bank is giv­ing greater con­sid­er­a­tion to man­ag­ing in­fla­tion­ary ex­pec­ta­tions in cal­i­brat­ing its mon­e­tary pol­i­cy in­stru­ments.

As of late Ju­ly 2014, sig­nals are mixed re­gard­ing the out­look for glob­al growth. In its lat­est World Eco­nom­ic Out­look (WEO) Up­date, the IMF in­di­cates that the glob­al re­cov­ery con­tin­ues but at an un­even pace, and that down­side risks re­main. In the Unit­ed States, ear­li­er op­ti­mism about growth prospects has mod­er­at­ed fol­low­ing an unan­tic­i­pat­ed sharp con­trac­tion in the first quar­ter of 2014, even though a re­bound in ac­tiv­i­ty is al­ready un­der­way.

Growth is im­prov­ing for some economies in the Eu­ro zone, while the eco­nom­ic re­cov­ery in the Unit­ed King­dom ap­pears to be sus­tain­able. Growth in most emerg­ing mar­kets, in­clud­ing Chi­na, re­mains at a slow­er pace than be­fore, part­ly due to soft­er ex­ter­nal de­mand.

Al­though geopo­lit­i­cal ten­sions are es­ca­lat­ing in sev­er­al re­gions around the world, ex­pec­ta­tions of changes in mon­e­tary pol­i­cy in the ma­jor in­dus­tri­al economies dom­i­nate sen­ti­ment in glob­al fi­nan­cial mar­kets. The Unit­ed King­dom is ex­pect­ed to be the first ad­vanced econ­o­my to raise in­ter­est rates, al­beit at a mod­er­ate pace, while the US Fed­er­al Re­serve is not an­tic­i­pat­ed to raise in­ter­est rates un­til lat­er in 2015.

By con­trast, the Eu­ro­pean Cen­tral Bank (ECB) re­cent­ly an­nounced a pack­age of pol­i­cy mea­sures to stim­u­late bank lend­ing and to ad­dress the risk of a pro­longed pe­ri­od of low in­fla­tion in the Eu­ro area.

Cor­po­rate­sec­tor op­ti­mistic

At home, the cor­po­rate sec­tor is still cau­tious­ly op­ti­mistic in its out­look for busi­ness ac­tiv­i­ty and eco­nom­ic strength.Re­sults from the Cen­tral Bank's sec­ond Busi­ness Con­fi­dence Sur­vey, con­duct­ed in the sec­ond quar­ter of 2014 in con­junc­tion with the Arthur Lok Jack Grad­u­ate School of Busi­ness, showed that al­most 80 per cent of firms ex­pect to in­crease their pro­duc­tion lev­els over the next six months.

More firms were al­so con­fi­dent that the lo­cal econ­o­my would im­prove over the next 12 months than in the first sur­vey.On the oth­er hand, 66 per cent of all busi­ness­es ex­pect their fi­nan­cial po­si­tion to im­prove in the next 12 months, down from 75 per cent of firms in the first quar­ter of 2014.

A re­cov­ery in busi­ness lend­ing and steady growth in con­sumer loans pro­vide sup­port to the pos­i­tive busi­ness sen­ti­ment. On a year-on-year ba­sis, pri­vate sec­tor cred­it grant­ed by the con­sol­i­dat­ed fi­nan­cial sys­tem ex­pand­ed by more than 6� per cent in May 2014 � the fastest rate since Feb­ru­ary 2009.Busi­ness lend­ing grew for the fourth con­sec­u­tive month, al­so, by around 6� per cent in May 2014, from just over 3 � per cent in April 2014.

Con­sumer lend­ing re­mained ro­bust, grow­ing at around 7� per cent in May 2014. Mean­while, the pace of re­al es­tate mort­gage loans slowed to just over 10.0 per cent in May 2014 from 14� per cent at the start of the year.Core in­fla­tion re­mained rel­a­tive­ly sta­ble in the first half of 2014. On a year-on-year ba­sis, core in­fla­tion stood at 2� per cent by the end of June 2014.

Head­line in­fla­tion slowed to 3.0 per cent while food in­fla­tion eased for the third con­sec­u­tive month to 3� per cent in June 2014.Ris­ing con­sumer de­mand, high­er Gov­ern­ment spend­ing and sec­ond round ef­fects from the re­cent in­crease in ce­ment prices could help to ac­cel­er­ate in­fla­tion­ary pres­sure lat­er in the year.

Ex­cess liq­uid­i­ty dips

Ex­cess liq­uid­i­ty in the bank­ing sys­tem fell be­low $5 bil­lion in the first three weeks of Ju­ly 2014. Com­mer­cial banks' ex­cess re­serves dropped to a dai­ly av­er­age of around $5.0 bil­lion over the pe­ri­od Ju­ly 1-21, 2014 from a lit­tle over $7.5 bil­lion in June and close to $8.5 bil­lion in May 2014.

In June 2014, the Cen­tral Bank is­sued a sev­en-year, 2.2 per cent coupon, liq­uid­i­ty ster­il­i­sa­tion Trea­sury bond, which re­moved ap­prox­i­mate­ly $1.0 bil­lion from the fi­nan­cial sys­tem. In ad­di­tion, cen­tral Gov­ern­ment's op­er­a­tions, which are usu­al­ly the main source of bank­ing sys­tem liq­uid­i­ty, re­sult­ed in a net do­mes­tic with­draw­al of rough­ly $1.3 bil­lion in the first three weeks of Ju­ly 2014. Fur­ther, Cen­tral Bank's sup­port to the for­eign ex­change mar­ket in Ju­ly al­so in­di­rect­ly with­drew $1.1 bil­lion from the sys­tem.

In­ter­est rate dif­fer­en­tials be­tween TT and US Trea­sury se­cu­ri­ties, though still low, have sta­bilised in pos­i­tive ter­ri­to­ry over the past few months, par­tic­u­lar­ly at short­er tenors. The three-month do­mes­tic Trea­sury Bill rate in­creased mar­gin­al­ly to 0.13 per cent in mid-Ju­ly 2014 from 0.12 per cent at the end of June 2014.

With the three-month US Trea­sury Bill rate hold­ing at 0.03 per cent, the TT-US in­ter­est dif­fer­en­tial widened slight­ly to ten ba­sis points as at Ju­ly 21, 2014, from nine ba­sis points at the end of June 2014.Mean­while, de­spite the on­go­ing re­duc­tion in the US Fed­er­al Re­serve's quan­ti­ta­tive eas­ing pro­gramme, strong ex­ter­nal de­mand has placed some down­ward pres­sure on longer-term US Trea­sury yields in re­cent months.

As such, the in­ter­est rate dif­fer­en­tial be­tween TT and US ten-year Trea­sury yields re­mained in pos­i­tive ter­ri­to­ry at around 14 ba­sis points as at Ju­ly 21, 2014, from ten ba­sis points at the end of June 2014.The Cen­tral Bank will con­tin­ue to close­ly mon­i­tor eco­nom­ic con­di­tions and is pre­pared to take fur­ther ac­tion, if nec­es­sary. The next mon­e­tary pol­i­cy an­nounce­ment is sched­uled for Sep­tem­ber 26.


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