Inflation a challenge for TT monetary policy

While the economy of Trinidad and Tobago is expected to maintain strong growth momentum during the second half of this year, the Central Bank is extremely concerned about one major risk to the economy in the short term – a rise in inflation. The strong growth is being driven by the high energy-related prices and continuing moderate growth in the non-energy sector.  But  recent increases in food prices have led to a spike in inflation.  Central Bank Govenor Ewart Williams has already expressed concern about  the inflation rate jumping past the four percent target for 2004. In its recently released Monetary Policy Report, the bank noted that,  “The combination of a stronger increase in interest rates abroad and increasing inflationary pressures, could present new challenges for monetary policy.” Additionally, there is a likelihood of additional price adjustments in some basic food items and an increase in the price of vegetables, due to continuous heavy flooding in agricultural districts. The effect of this year’s hurricanes, which wreaked havoc on the Caribbean, is also exerting some inflationary pressure on the local markets.

Another area being closely monitored by the Bank is the continuing drop in US interest rates. “Currently,” states the Report, “the differential between US and domestic short term interest rates is about three percentage points, compared with close to four percentage points at the beginning of the year and as high as five percentage points before US interest rates began to be reduced in 2001. There is a risk that a further erosion of the interest rate differential could lead to an increase in capital outflows,” the report pointed out. Wary about such a development the Bank stated it intended to keep “monetary policy under close review in the period ahead. In the event of any further pick up in inflation and/or an acceleration of interest rate adjustment in the US, a change in the current accommodative monetary stance will need to be seriously considered.”   The Report, in speaking to fiscal developments in TT, pointed out that the non-oil sector overall fiscal balance, which, by the way, is a better indicator of the budgetary impact on domestic demand, improved slightly, registering a deficit of 8.2 percent of GDP in fiscal year 2004, compared with 8.3 percent of GDP in the previous year.  “This deficit,” continued the Report, “is an important contributor to the liquidity buildup in the economy.”

In other fiscal activities, including the rest of the public sector, there was a decline in public sector indebtedness from 55.9 percent of GDP at the end of September 2003 to 52.7 percent of GDP at the end of September 2004.  “Total external debt,” stated the Report, “also declined from 15 percent to 13.1 percent of GDP.” Meanwhile, a look at some of the economies of our next-door Caricom neighbours revealed that most of them showed improvement in the first half of 2004. The Report points out that the economy of Barbados expanded by approximately 2.7 percent in the first six months of the year with tourism as the main engine of growth, while inflation remained at around two percent and interest rates have remained significantly lower than in TT. The nine-state grouping of the eastern Caribbean (OECS) which reflected a rebound in their economies in 2003 following a period of stagnation, continued to show growth momentum in the first half of 2004, again based on increased tourist arrivals. 

Inflation in these territories has remained low, at about 1.5 percent on average. “Hurricane Ivan, which struck several of the OECS islands in September would have seriously affected economic prospects for some of these economies,” stated the Report Real GDP growth in Jamaica reached 2 percent in first quarter of 2003/2004 led by strong performances in the tourism and mining sectors. Macroeconomic indicators were also favourable in the June quarter and this was expected to continue into the third quarter. Inflationary pressures in Jamaica also moderated as that rate for the second quarter (1.9 percent) was the lowest for a June quarter in six years. “Against the background of an extended period of stability in the foreign exchange market and an improved macroeconomic environment, the Bank of Jamaica has lowered interest rates on several occasions during 2004,” added the Report.