Food Price Inflation Edge Upwards
The Central Bank of Trinidad and Tobago (CBTT) announced that Headline Inflation, measured by the Index of Retail Prices, rose to 4.90 per cent year-on-year (YOY) in the month of September, up from 4.30 per cent in August 2009. The food sub-index, which has been the foremost driver of headline inflation in the past, rose to 6.80 per cent in September from 5.20 per cent in August. Core inflation (inflation ex-food prices) also edged upwards slightly to 3.90 per cent in September from 3.80 per cent in the previous month. On a monthly basis, headline inflation rose by 2.10 per cent in September, from 0.40 per cent in August. Figure 1, shows that monthly headline inflation is at its highest over the last twelve months.
The rise in the food inflation price index was led by higher (YOY) prices in the sub-indices of meat (2.50 per cent from 2.20 per cent), vegetables (0.80 per cent from -1.10 per cent), and sugar, jam, and confectionery (5.20 per cent from 3.50 per cent). There were however, (YOY) decreases in the sub-indices of bread and cereals (-7.10 per cent from -5.10 per cent), fish (3.50 per cent from 10.70 per cent), milk, cheese and eggs (-9.20 per cent from -6.40 per cent), oils and fats (4.20 per cent from 6.20 per cent), and fruits (40.20 per cent from 44.30 per cent).
After remaining at 3.80 per cent for the previous two months, core inflation crept up to 3.90 per cent as a result of increases in the sub-indices of alcoholic beverages and tobacco (6.30 per cent from 4.10 per cent), due to new taxes levied on these items after the 2009/2010 fiscal budget; and housing, water, electricity, gas and other fuels (2.70 per cent from 2.00 per cent). There were however, declines in the sub-indices of health (5.20 per cent from 5.60 per cent) and clothing & footwear (-1.00 per cent from -0.70 per cent). The Bank pointed out that, the main reason for the slide in inflation within recent months has been the decline in local economic activity and sluggish domestic demand.
Excess liquidity continues to plague the local financial system, as the CBTT noted that over the past three months excess reserves at commercial banks have averaged around $2.1 billion, this was partly due to an increase in net domestic fiscal injections.
Against the backdrop of a slowdown in the local economy and a subdued credit market, the CBTT decided to maintain its benchmark rate, the Repo Rate, at 6.25 per cent, despite inflation edging back upwards. The CBTT also left its other monetary policy instrument, the Reserve Requirement Ratio unchanged at 17.00 per cent.
Interest Rate Report
and Outlook
US$ Rates
After four consecutive quarters of negative growth, the United States Gross Domestic Product (GDP) increased by 3.50 per cent in the third quarter of 2009 from -0.70 per cent in the second quarter. This caused US Treasuries price to fall over the past month as investors moved out of the safety of US Government guaranteed debt, and into riskier assets as there are increasing signs of a recovery. The Standard and Poor’s 500 index is up 17.95 per cent year to date, while the Dow Jones Industrial Average is up 13.41 per cent, over the same period, and unemployment has also started to decline as the number of Americans receiving jobless benefits declined by 148,000 as at October 17, however the total number of persons unemployed stands at 5.80 million. Yield on the benchmark 10-year Treasury note rose to 3.50 per cent from 3.18 per cent a month ago; the longer 30-year note also rose to 4.35 per cent from 3.96 per cent a month earlier. Thus US Treasury holders lost 0.25 per cent over the past month, as indicated by the US$ Treasuries Total Return Index, year to date US Treasuries sustained a loss of 1.82 per cent.
Locally, rates on US Dollar Deposits continued to fall. On the shorter end of the curve, rates offered by financial institutions on 90 day deposits would earn investors 0.78 per cent on average, compared to 1.00 per cent a month ago, and one-year deposits would earn investors 1.00 per cent, compared 1.47 per cent a month earlier. US Dollar Money Market Mutual Funds still offer investors one of the highest rates of return, despite being on the decline since the beginning of the year. On average US$ money market mutual funds are offering yields of 2.71 per cent to investors.
TT$ Rates
Significant excess liquidity in the financial system has driven yields down as recent bond issues have been heavily over subscribed. The Government of Trinidad and Tobago (GOTT) guaranteed Education Facilities Company Ltd (EFCL) $400 million 5.35 per cent bonds due in 2016 were issued at a yield to maturity of 5.32 per cent as investors paid a premium to acquire this debt. The same occurred with the reopening of the previously under subscribed GOTT 6.40 per cent 2020 bonds, the remaining TT$231 million was snapped up at an average price of $100.37 per $100 face value, yielding investors 6.38 per cent. Table 1 lists the publicly auctioned debt in 2009 thus far. Issuers have capitalised on the low interest rate environment as they are easily raising debt at lower costs.
TTD YIELD CURVE
The yield on the latest 91-day Treasury Bill, issued on October 21, decreased by 10 basis points (bps) to 1.50 per cent from the previous auction, and from 7.12 per cent at the beginning of the year (a 5.62 per cent decline), as investors continued to demand Government secured debt. Coupled with the result of the latest Government guaranteed 7-year and 11-year issues, this has shifted the entire yield curve (Figure 3) downwards. Existing bond issues have become more valuable because of the lower return being earned on the newer debt.
The benchmark yields in constructing the curve were:
Note: The BSL yield curve was constructed using actual and empirical trading and indicative data, plotting the data points and interpolating to develop a spectrum of yields across the curve. Actual short-term rates were obtained by using the latest Treasury Bill yields.
