Port-of-Spain----3 Oct. 2006----Recent data released by the Central Statistical Office indicate that inflationary pressures continue to persist in the domestic economy. Headline inflation increased to 9.0 per cent on a year-on-year basis to August, from 8.6 per cent in the previous month.

Food prices continued to drive headline inflation rising by 24.7 per cent in the twelve months to August. Sharp increases in the prices of fruits (23.4 per cent), vegetables (62.4 per cent) and fish (34.4 per cent) were mainly responsible for the rise in food inflation.

Core inflation, which strips out the volatile movement in food prices, slowed to 3.9 per cent after having posted an increase of 4.0 per cent in the twelve months to July 2006. The slowing in the core rate of inflation in August has been traced, by and large, to a decline in the cost of health services. The rise in headline inflation during 2006 has been particularly rapid with the 12-month rate accelerating from 7.2 per cent as at the end of 2005 to the current level of 9.0 per cent. While food prices have been the main driver, core inflation has also moved from 2.7 per cent as at the end of 2005 to 3.9 per cent as at the end of August 2006.

There is strong evidence of a marked increase in inflationary expectations. Among the indicators are the recent hike in maxi taxi fares, an increase in the price of bread and, more importantly, rising industrial relations tensions and increasing wage demands. These latter trends are likely to moderate only if it is evident that strong and credible steps are being taken to reduce inflation.

Recent data also indicate that the net fiscal injection continues to expand. While one contributory factor may be the end-of-the-year fiscal spending rush, the main factor is the overall budgetary stance. The growth in credit to the private sector has continued to decelerate on a year-on-year basis to 9.1 per cent in July from 17.5 per cent in May 2006. However, year-on-year growth in consumer credit has continued to be strong measuring 15.0 per cent as at the end of July 2006.

Yields on short-term treasury securities have risen steadily in line with the sustained increase in the Bank’s policy rate. Yields on three-month and six month treasury bills currently stand at 6.8 per cent and 7.3 per cent, respectively. With the pause in monetary tightening by the US Federal Reserve, rising domestic short-term interest rates have resulted in a widening of the differential between US and TT short-term interest rates. This differential increased to 193 basis points in September from 61 basis points in February.

While any sustained decline in food prices could only be achieved over time, the Bank is committed to using all the available instruments to tighten liquidity, increase the structure of interest rates and dampen inflationary expectations.

On this basis, the Bank has taken the following actions:

1. Raised the “Repo” rate by 25 basis points to 8 per cent.

2. Introduced, on a temporary basis, a secondary reserve requirement of 2.0 per cent of the prescribed liabilities of commercial banks.

The secondary reserve is in addition to the existing primary reserve ratio of 11 per cent. Balances held as secondary reserves will be remunerated at an interest rate which is 350 basis points below the “Repo” rate. The secondary reserve requirement will take effect from October 4, 2006.

The Bank will continue to intensify open market operations. To help the commercial banks with their liquidity management, the Bank will also increase the range of instruments used in open market operations by introducing instruments of very short maturities.

The Bank will continue to keep a close watch on economic developments and particularly on the factors that have a bearing on inflation and inflationary expectations, and will be prepared to take any additional action as needed.

The next ‘Repo’ rate announcement is scheduled for October 27, 2006.