Port-of-Spain, Trinidad -- April 25, 2008 -- Recent inflation data released by the Central Statistical Office indicate that headline inflation, measured by the 12-month increase in the Index of Retail Prices, rose to 9.8 per cent in March 2008 from 9.4 per cent in the previous month. This up-tick in the rate was led by food prices which rose on a year-on-year basis to March by 19.7 per cent from 18.8 per cent in the previous month.

The main contributors to the rise in food inflation were increases in the prices of bread and cereal (19.0 per cent), fish (37.2 per cent), and oils and fats (11.8 per cent). The sharp rise in the prices of bread and cereal follow upon substantial increases in the global prices for wheat, corn and edible oils and fats. The rate of price increases slowed however in the sub-indices for meat, fruits and milk, cheese and eggs.

Core inflation, which extracts the effects of food prices from the index of retail prices, measured 5.7 per cent roughly the same rate as in the previous two months. The sub-indices for health services, alcoholic beverages and tobacco and clothing and footwear posted increases of 7.1 per cent, 13.7 per cent and 2.8 per cent, respectively.

After declining to a low of 7.3 per cent in October 2007, inflation has picked up markedly over the past six months as demand pressures continue unabated and as the significant increases in global food prices work themselves through the system. Bread, cereals, edible oils and dairy prices reflect the significant increases that are taking place at the global level.  The high prices of fruits and vegetables are a result of domestic agricultural bottlenecks.

Liquidity in the domestic system remained high partly on account of increased net domestic fiscal injections. Moreover, in the twelve months to February 2008, bank credit
increased at a rate of around 23 per cent adding to already heightened demand pressures. Consumer credit continued to increase at a rapid rate outstripping the rate of expansion in business credit.

In a bid to contain demand pressures, the Bank has not only made more intensive use of open market operations but also instituted additional monetary tightening measures in late February 2008. These measures involved an increase in the repo rate by 25 basis points to 8.25 per cent and a two-percentage point increase (from 11 per cent to 13 per cent) in the statutory reserve requirements for commercial banks.

Following these measures, commercial banks announced with effect from March 01, 2008 an increase in interest rates on retail loans. The minimum lending rate for new car loans has been increased to prime plus 100 basis points and that for used cars to prime plus 250 basis points. In addition, new residential and commercial mortgage rates have been increased by 50 basis points each.

These measures have not yet worked their way fully through the financial system and the wider economy. Inflation control is likely to remain challenging in the upcoming months in the face of rising
global food prices and higher import costs. Announced increases in domestic electricity rates, which take effect in May 2008, as well as the continuing increase in food prices are intensifying inflationary expectations.

The Bank will continue with further monetary tightening. The Government has announced a series of short-term measures that could impact on food prices including imports from lower-cost
countries. These measures should begin to have an impact in the near future.

In the meantime, the Bank has decided to maintain the repo rate at 8.25 per cent while it evaluates the impact of the measures on credit expansion and liquidity.

The Bank will keep economic and monetary conditions under close review. The next ‘Repo’ rate announcement is scheduled for May 29, 2008.