By CentralBankNews.info
Trinidad and Tobago’s central bank raised its benchmark repurchase rate by 25 basis points for the second time in a row and hinted it may raise its further by saying it “is prepared to further position its monetary policy to address any challenges that may arise in coming months.”
The Central Bank of Trinidad and Tobago has now raised its repo rate by 50 basis points to 3.25 percent after starting the tightening cycle in September.
The central bank spelled out three reasons for raising its policy rate.
First, U.S. dollar assets are more relatively more attractive than assets denominated in Trinidad and Tobago dollars and an expected increase in U.S. policy rates by the Federal Reserve from around the summer of next year could prompt capital to leave Trinidad & Tobago in search of higher yields.
Second, headline inflation accelerated to 9 percent in October from 7.79 percent in September, the fastest pace of inflation since July 2012, the bank said. With recent flooding, food crop prices are expected to increase further and high public spending is adding to elevated liquidity levels and may increase core inflation in the period ahead.
Third, the near-term growth outlook for the country’s non-energy sector is for continued steady performance and strong growth in the U.S. augurs well for the tourism sector.
The Central Bank of Trinidad and Tobago issued the following statement:
First, the US Fed ended its quantitative easing program in October 2014 and is expected to gradually increase its policy interest rate from around summer 2015. At current interest rates, US dollar assets are relatively more attractive than TT dollar assets. In October 2014, the benchmark 10-year TT Treasury bond yield stood at 2.73 percent compared to a yield of 2.35 percent on the 10-year US Treasury bond. Expected increases in US interest rates could narrow this interest rate differential and prompt portfolio capital to move out of Trinidad and Tobago in search of higher yields.
Second, headline inflation further accelerated to 9 percent in October 2014. This was the fastest headline inflation rate since July 2012. The pickup in headline inflation is mainly due to an escalation in food price inflation, which remained in double-digit territory (20 percent) for the fourth successive month in October 2014. Rising food prices reflect lower domestic agricultural output partly due to the cessation of planting by Caroni Green Limited as a consequence of its prolonged organizational restructuring. With the recent heavy rainfall and flooding in some parts of Trinidad, food crop prices are expected to further increase. Higher public spending through the expansionary 2014/2015 Budget is already adding to elevated liquidity levels (currently around $8 billion) and may increase core inflation in the period ahead.
Third, the non-energy sector has delivered fairly respectable growth for 14 consecutive quarters to September 2014 and the near-term outlook is for continued steady performance in non-energy output.
In addition, growth is strengthening in the United States and this augurs well for tourism-based CARICOM economies which are major markets for Trinidad and Tobago’s non-energy exports.
Central Bank continues to monitor local and international economic conditions and is prepared to further position its monetary policy to address any challenges that may arise in coming months.
The next Monetary Policy Announcement is scheduled for January 30th 2015. “
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