geisha.kowlessar@guardian.co.tt
The Central Bank has kept its monetary policy stance unchanged.
The bank kept the short-term rate on its overnight collateralised financing to commercial banks, the Repo rate, at 3.50 per cent following its Monetary Policy Committee (MPC) meetings in December 2021 and March 2022.
The MPC focused on the early signs of domestic economic recovery, boosted by modest business credit expansion and relatively contained cost-push inflation, the bank noted in its Monetary Policy Report on Monday.
Nonetheless, it said the MPC took note of the rising importance of foreign inflationary influences and the fact that higher interest rates abroad could lead to some incentive to capital outflows.
It explained that domestically, signs of a fairly broadbased economic recovery became more evident during the fourth quarter of 2021.
Production data point to an uptick in energy sector activity in the final months of 2021.
In addition, the continued rollback of restrictions on movement led to a gradual resumption in output in many non-energy sector businesses, including distribution, manufacturing and construction.
However, the bank said supply-side factors are contributing to increases in inflation.
It noted that the surge in international prices for food staples such as sugar, wheat and vegetable oils, higher shipping costs, transportation delays, and adverse weather conditions led to marked increases in food inflation.
Additionally, the bank said core inflation (which excludes the food component) also rose with the lowering of the subsidy on domestic gasoline prices, and the pass-through of increases in global costs of construction materials, such as cement, to domestic consumers.
According to the bank financial system liquidity declined but remained adequate, while interest rate differentials narrowed.
Excess liquidity, as measured by commercial banks’ reserves held at the Central Bank in excess of the required levels, declined from $7.7 billion in November 2021 to $3.9 billion in April 2022, the report detailed.
It also noted that a rebound in business lending in October 2021, and a continued rise in real estate mortgage lending, contributed to the increase in consolidated system credit.
However, consumer lending remains stymied. Credit conditions allowed for a small reduction in bank’s lending rates, from 7.04 per cent to 6.93 per cent on average between September 2021 and March 2022, the bank added.
According to the bank, external monetary policy tightening has resulted in the TT/US short-term interest rate differential moving from 27 basis points to -42 basis points below from November 2021 to April 2022; the differentials on the longer term end moved from 356 to 209 basis points.
Hence, it is in this context, the Central Bank explained that it has kept its monetary policy stance unchanged.
Regarding its outlook, the bank said domestic economic activity in the non energy sector will continue to recover as the full effect of the reopening takes root.
This, it noted, is expected to lead to a gradual increase in employment opportunities; at the same time, job content and the requirement for physical presence on work sites are expected to be permanently affected by the “pandemic-induced” switch to greater virtual transactions.
Comfortable liquidity levels will continue to provide space for business financing, particularly as the Government’s possible need for lower domestic funding reduces the likelihood of crowding out, the bank added.