Central Bank ready to tighten monetary policy

THE CENTRAL BANK stands ready to tighten monetary conditions in Trinidad and Tobago because of current industrial relations tension and the rise in basic food prices which could lead to a high inflation rate. Food prices rose by 13.8 percent last year compared to a 4.2 percent increase in 2002. Central Bank Governor Ewart Williams said yesterday the bank was anxiously awaiting inflation data from the Central Statistical Office (CSO). He said that data and ongoing developments in foreign exchange markets will be taken into account before consideration is given to policy changes.

He was speaking at the launch of the Monetary Policy Report for March 2004 at the Central Bank conference room, Level 16, Central Bank, Port-of-Spain. Williams admitted that there have been changes to the country’s economic environment this year, but stressed that “in the bank’s view, there is not yet a compelling case for an immediate change in the monetary policy stance.” He said the most important external event was the strong hints from “the Federal Reserve that an interest rate increase would not be forthcoming until the second half of the year.” Williams said that was based on slow employment response in the continuing recovery in the US economy.

Here at home, Williams said there were no “definitive signs of a pick-up in the non-energy sector and the latest data available from the CSO did not yet show a major rise from inflation.” He conceeded however that there were major risks in the present economic situation. He identified as the most important, “the current nervousness in the industrial relations climate” which he said “could have negative short and medium term effects on economic activity in both the energy and non-energy sector.” Additionally, the Governor said “there has been a noted increase in inflationary expectations, together with announced increases in certain basic food commodities, as well as in fuel and construction materials.”

He said “anecdotal evidence suggests broader increases in food prices. Added to this, annual wage settlements in late 2003 and early 2004 are higher than over the past few years.” The Monetary Policy Report for March this year notes the impact of increased food prices, transportation charges, and construction materials, combined with the increased pattern of wage settlements could raise headline inflation over the 4.0 percent target. It also said that data from the CSO (December) suggested that inflationary pressures have been gathering greater momentum largely on account of increases in food prices.

Headline inflation rose by 3.8 percent in 2003, compared with 4.2 percent in 2002. Food prices rose by 13.8 percent last year compared with 10.2 per-cent in 2002. Core inflation, which removes the effects of extreme movements in food prices, increased by 1.7 percent last year compared to the 0.6 percent in 2002. Producer prices rose by an annualised rate of nine percent in the third quarter of 2003, compared with an increase of 2.0 percent in 2002.