Central Bank puts Repo Rate on hold

THE CENTRAL Bank of Trinidad and Tobago says it has decided not to increase the Repo Rate, after looking at several aspects of the financial status of the country, including the downward trend of inflation for the first quarter of 2004 and the country’s credit growth and foreign reserves. The bank also noted it was mindful that the inflation trend could change at any time, and was ready to increase the Repo rate if necessary, in order to meet the inflation target.

The bank’s policy interest or Repo rate has been set at five percent since September 4, 2003, but the announcement on June 30, that there was an increase of  0.25 percent in the federal funds had caused some anticipation that the Repo rate would have been adjusted. At a press briefing yesterday, Central Bank Governor Ewart Williams noted that in the international banking arena, the Bank of England raised its interest rates four times since 2003 in order to nudge the inflation rate back to its two percent target, as well as to ensure that the GDP growth did not exceed its long-term potential.

The European Bank, he explained, had left the policy unchanged in the face of the US Federal Reserve’s interest rate increase from one percent to 1.25 percent, because inflation in the Eurozone was in line with the bank’s medium-term target, while Japan had maintained its zero interest rate policy. With regards to TT, Williams said the current inflation performance continued to be in line with the targetted rate of four percent for 2004, and though the domestic demand has been sluggish, the inflation rate has remained low. Williams added that while the country’s credit growth has picked up in response to the steep drop in interest rates towards the end of last year, a meaningful recovery of activity in the non-energy sector was still not imminent.

In addition, the country’s foreign reserve position is strong, and the current differential between domestic and foreign interest rates seem large enough not to serve as an incentive for capital overflows. Williams said these were all taken into consideration before the decision was made to keep the interest rate at its current position. He noted, however, that the Central Bank was mindful that the inflation trend could change at any time, especially if there was an increase in the general wage level settlements, plans for major increase in Government’s spending were announced, or the prices of commodity imports and inflationary expectations continued to increase. Williams explained that the bank intended to keep monitoring the situation for any inclination that any of these things may happen and stands ready to raise interest rates as needed to meet the inflation target.