Caution needed

The flagship document covering May to November 2016 reveals that inflation remained well contained, with headline inflation in September at three per cent and core inflation at 2.3 per cent.

These low levels of inflation were recorded even though fuel prices went up and there was a significant increase in the number of items in the Value-Added Tax (VAT) base in April. In addition, there is the inflationary component of the 4.4 percent depreciation of the local currency against the US dollar that occurred from January.

Admittedly, it is quite possible the latter was not allowed to be borne by the consumer as businesses may have partially taken up some of the increased costs. Additionally, the increased unemployment, a wait-andsee attitude by both consumers and businesses, would have had a dampening effect on the aggregate demand side and so resulted in a containment of the overall retail price.

This certainly also reflects the effects of job losses, fiscal constraints expressed by a fall-off in government expenditure, fall in investment expenditure, and significant drop in export earnings. These are indicative of the challenging times faced by the TT economy during the past few months.

One wonders though if the CBTT has abandoned forward guidance or is bent on moving away from the accommodative monetary policy stance which it adopted during the global financial crisis. Certainly, there are no inflationary pressures as reported by the CBTT. This provides a useful buffer if and when the US Federal Reserve decides to increase its interest rates. Then, what is the monetary stance expected to be? Is this going be a very gradual shift away from that of an accommodative stance? What about the mandate to stimulate the economy? Certainly, one can understand the caution and indeed the apparent placement of emphasis on the narrowing of TT-US differentials as having higher risks to the economy than rising interest rates will have on growth.

Although there has been a substantial fall in Government net domestic fiscal injections, the CBTT has reported an increase in excess liquidity to an average of just over $4 billion monthly, from $3.5 billion monthly over the same period in 2015. This may be more the action of the CBTT allowing liquidity levels to rise to permit participation in Government’s bond offerings.

Business credit over the first eight months of 2016 contracted by 2.8 per cent, but real estate loans to business increased by 8.6 per cent.

The CBTT reported consumer lending at 8.0 per cent in August, compared to 8.7 per cent growth eight months earlier. Motor vehicle loans recorded double-digit growth (14.3 per cent) in June. Credit card loans also grew strongly (12.8 per cent) in June.

There has been a slump in new mortgages which contracted by 19.0 per cent in June, affecting real estate mortgage lending over 2016 with real estate mortgages to consumers which account for 70 per cent of total real estate mortgage lending.

Rising mortgage interest rates in the first half of the year led to residential mortgage loans decelerating to 4.5 per cent in August from 8.0 per cent in January.

The question that arises is what is the biggest risk to the economy.

Is it the increase in American interest rates or the lack of growth in the economy? If the former, then there is the need for the CBTT to maintain the differential by itself raising the interest rates. A warning however that the latter approach could result in slowing credit formation and this could prevent a jump-start of the economy. There is need for caution all around.