Port-of-Spain -- June 23, 2008 -- The latest data on inflation released by the Central Statistical Office indicate that headline inflation rose to 10 per cent on a year-on-year basis to May 2008 from 9.3 per cent in the previous month.

This increase was led by food prices which rose by 21.8 per cent in May from
19.5 per cent in the previous month. On a monthly basis, food prices rose by 4.0 per cent – the largest monthly increase since February 2005. The main contributors to food inflation were increases in the prices of bread and cereals (35.1 per cent on a year-on-year basis), fruit (33.6 per cent), vegetables (22.6 per cent) oils and fats (20.2 per cent), and meat (13.4 per cent).

The worldwide increase in the price of cereals would have contributed to the rise in the prices of rice and flour in particular. While the prices for fish and milk, cheese and eggs continued to increase, the rate of increase slowed. In respect of fish, the rate was 25.4 per cent on a year-on-year basis to May compared with 32.6 per cent in April while for milk, cheese and eggs, the rate
was 25.8 per cent compared with 28.5 per cent.

Core inflation, which filters out the effects of food prices, remained virtually unchanged from the previous month at 5.2 per cent. The rate of increase in the sub-indices for alcohol and clothing measured 13.5 per cent and 4.2 per cent (year-on-year) in May, respectively, while those for health and housing slowed to 5.4 per cent and 1.8 per cent, respectively.

During May, price increases for several basic commodities went into effect. Information obtained from NAMDEVCO shows sizeable increases in the prices for some agricultural commodities. Carrots increased to $10.99 per kg from $9.29, while Cassava rose to $3.44 per kg from $3.31. Chive showed an even more significant increase to $16.93 per bundle from $12.19.

Transportation costs have also been increasing. For example, the San Juan Taxi Drivers’ Association has increased its fare by $1.00.
Liquidity in the financial system has been relatively tight over the past two months. In response, commercial banks have made greater use of the inter-bank market and the repurchase facility at the Central Bank to meet their funding requirements. As a result, the weighted average interbank rate rose from 7.3 per cent in April to 7.4 per cent at the end of May.

The rate of bank credit expansion has declined slightly but remains unacceptably high.

Private sector credit increased by 17.7 per cent (year-on-year) in April compared with 17.8 per cent in March. The expansion in credit continues to be mainly in the areas of consumer loans (19.5 per cent year-on-year to April) and real estate mortgage loans (20.9 per cent). However, the
pace of business credit expansion slowed to 14.8 per cent (year-on-year) to April from 16.5 per cent in March.

The amalgamation of RBC/RBTT is expected to inject a sizeable amount of liquidity into the financial system as shareholders of RBTT begin to receive their cash settlements. To contain the liquidity impact of this cash injection, the Government is issuing the first tranche of sterilization bonds of FV$1.2 billion on July 2, 2008. Several private financial institutions are also taking steps to mobilise some of the increased capital inflows to finance both regional and local projects.

Additionally, the Bank has intensified the level of open market operations.
Inflation control is likely to present increased challenges over the next several months especially against the background of rising food and energy prices at the global level, continued fiscal pressures and increasing inflationary expectations. The situation could be exacerbated if the advent of the rainy season affects domestic agricultural supplies as has occurred in the past few
years. The Bank will be paying close attention to the many factors noted above and will take additional action as needed to address inflationary pressures.

Against the background of intensified liquidity absorption measures, the Bank has decided to maintain the “repo” rate at 8.25 per cent.
The next ‘Repo’ rate announcement is scheduled for July 25, 2008.