Inflation pressures cause repo rise

The repo rate is the rate Central Bank charges commercial banks for overnight lending and is used to send signals as to how fast and in what direction they ought to move their interest rates.

The latest available data on prices released by the Central Statistical Office (CSO) indicate headline inflation measured 6.5 percent year-on-year to February 2006, is down from 7.04 percent in January.

But it was noted that this was still outside of the bank’s target range of four-five percent. Core inflation held steady at 2.5 percent, the bank said in a press statement. The bank said it has intensified efforts at absorbing liquidity, including the use of longer-term debt instruments.

As a result, treasury bill yields have increased by 50 basis points since the start of the year. Jwala Rambarran, chief economist at Caribbean Money Market Brokers, said the dip in headline inflation was no cause for celebration and said he saw more pressure being put on the economy.

In addition to the TTEC rate hike which is going to hit both domestic and commercial users hard and have a ripple effect across the economy, Rambarran said the labour shortage in the construction sector will have an impact as well. Rambarran said unions demanding higher packages for their workers are not welcome news for the Central Bank. This was the third repo increase in three months, he said, noting that what the bank was doing was traditional monetary pricing.

On the private sector side, the bank noted that strong bank credit growth has persisted notwithstanding the steady rise in commercial banks’ prime lending rates. “In the 12 months to January 2006, private sector credit increased by 20.3 percent from 12.0 percent one year ago, with consumer credit (25.1 percent) leading overall credit expansion,” it was noted. On this, Rambarran said the bank realises that price pressures are in the pipeline.

The bank said its decision to raise the repo rate also comes against the background of narrowing of the differential between TT and US dollar short-term interest rates, as US rates continue their upward climb.