Inflation Tumbles

The Central Bank of Trinidad and Tobago (CBTT) announced on November 20 that Headline Inflation, measured by the Retail Price Index, slowed to 2.70 per cent year-on-year in the month of October, down from 4.90 per cent in September 2009, this has been the lowest rate of price increases since January of 2003. The food sub-index, the foremost driver of headline inflation, slowed to 3.50 per cent in October from 6.80 per cent in September. This was the first time in nearly ten years that food price inflation fell below four per cent. Core inflation (inflation ex-food prices) also fell to 2.20 per cent in October from 3.90 per cent in the previous month. On a monthly basis, headline inflation contracted by 0.70 per cent in October, from a 2.10 per cent increase in September. Figure 1, depicts the decline in the rate of inflation over the last twelve months.

The decline in the food inflation price index was led by lower year-on-year prices in the sub-indices of bread and cereals (-7.60 per cent from -7.10 per cent), meat (1.30 per cent from 2.50 per cent), fruits (29.30 per cent from 40.20 per cent), milk, cheese and eggs (-9.80 per cent from -9.20 per cent), oils and fats (3.00 per cent from 4.20 per cent), and sugar, jam, and confectionery (0.10 per cent from 5.20 per cent). There were however, year-on-year increases in the sub-indices of fish (7.30 per cent from 5.30 per cent), and vegetables (1.70 per cent from 0.8 per cent).

Core inflation fell to 2.20 per cent in October as a result of across the board declines in the sub-index, however their were increases in the sub-indices of alcoholic beverages and tobacco (12.60 per cent from 6.30 per cent), health (6.80 per cent from 5.20 per cent), medical services (14.10 per cent from 10.00 per cent), water, electricity, gas and other fuels (2.90 per cent from zero per cent). The Bank noted that the rise in the sub-index of health was due to increased medical fees, while the rise in the price of alcoholic beverages and tobacco was attributed to the tax increases announced in the 2010 fiscal budget. The Bank recognised the decline in local economic activity and a delayed impact of lower international commodity prices, as the main contributors to the sharp decline in the rate of inflation.

As the Trinidad and Tobago economy recorded its third successive quarter of negative economic growth, private sector credit by the consolidated financial system contracted by 0.40 per cent from an increase of 2.10 per cent in August and 11.80 per cent one year ago. This was the first time in seven years that private sector credit has contracted. The Bank noted that of the three major categories of private sector credit, consumer lending continued to decline, falling by 2.10 per cent in September; while the growth of credit to businesses (6.50 per cent from 9.80 per cent) and lending for real estate mortgages (nine per cent from 9.80 per cent) also recorded declines on a year-on-year basis in September from August 2009.

Excess liquidity continues to plague the local financial system as private sector credit continues to decline and net fiscal injections continues to increase. With around TT$2.5 billion in excess reserves in the system, the Central Bank requested that commercial banks deposit TT$2 billion in interest bearing accounts at the Central Bank, as they attempt to mop up excess liquidity.

Against the backdrop of a slowdown in the local economy, a subdued credit market, and a low inflationary environment the CBTT decided to lower its benchmark rate, the Repo Rate, by 50 basis points to 5.75 per cent. The CBTT also left its other monetary policy instrument, the Reserve Requirement Ratio unchanged at 17 per cent.

Interest Rate Report and Outlook

US$ Rates

At the latest Federal Reserve Open Market Committee (FOMC) meeting, US policy makers left their benchmark rate the Fed Fund rate at a range between zero per cent and 0.25 per cent, and indicated that the rate would remain at zero for an extended period, as long as inflation expectations are stable and unemployment fails to decline. According to Bloomberg data, the earliest that the FOMC is projected to begin raising interest rates is in the third quarter of 2010. Yield on the benchmark 10-year Treasury note fell to 3.27 per cent from 3.50 per cent a month ago; the longer 30-year note also fell to 4.24 per cent from 4.35 per cent a month earlier. Thus US Treasury holders gained 0.98 per cent over the past month, as indicated by the US$ Treasuries Total Return Index. Year to date US Treasuries sustained a loss of 2.35 per cent.

Locally, rates on US Dollar Deposits have edged upwards after falling to historically low levels. On the shorter end of the curve, rates offered by commercial banks on 90-day deposits would earn investors 1.13 per cent on average, compared to 0.78 per cent a month ago, and one-year deposits would earn investors 1.63 per cent, compared one 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

A significant amount of excess liquidity in the local system has been driving short-term rates to historically low levels since the beginning of the year, as previously mentioned, the Central Bank requested that commercial banks place TT$1 billion in an interest bearing account earning one per cent for one year and another TT$1 billion earning 1.50 per cent for one and a half years in an attempt to reduce the amount of liquidity in the system.

As the Bank announced these latest measures to combat excess liquidity, the yield on the latest 91-day Treasury Bill, issued on 18th November, rose by seven basis points (bps) to 1.57 per cent from the previous auction on November 4 ( compared to 7.12 per cent at the beginning of the year). The latest 182-day Treasury Bill, also rose to 1.51 per cent on November 23 from 1.47 per cent on November 9, an indication that short-term government yields are beginning to bottom out after plummeting since the start of the year.

TT$ YIELD CURVE

The Trinidad and Tobago sovereign yield curve (Figure 2) has flattened on the shorter end of the curve, since the latest three and six months Government paper are essentially earning around the same rate of return. However yields on the longer end of the curve have fallen slightly due to lower inflationary expectations, shifting the curve downwards.

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.