Inflation on the offensive

from 5.3 percent in March 2009.

Below, we reproduce the bulletin

for our readers:

The latest statistics on retail prices released by the Central Statistical Office show a moderate increase in the domestic inflation rate. Headline inflation, measured by the 12-month increase in the Index of Retail Prices, rose to 11.9 percent in April 2009 from 11.3 percent in March.

Food inflation, the key driver of the headline inflation rate, rose by 25.2 percent in the twelve months to April 2009 from 24.5 percent in the previous month. The increase reflected, for the most part, higher prices for fruits (36.6 percent) and vegetables (35.7 percent), which together account for 20 percent of the food sub-index.

The rate of price increases however slowed for bread and cereals (31.9 percent in April 2009 compared with 40.9 percent in March 2009), oils and fats (21.1 percent compared with 26.3 percent), milk, cheese and eggs (0.3 percent compared with 2.1 percent) and fish (13.3 percent compared with 16.3 percent).

On a monthly basis, headline inflation rose by 1.1 percent, after posting declines in the first two months of the year. For the month of April, food inflation rose by 0.7 percent, slightly below the 0.8 per-cent monthly increase recorded in March. The sub-indices for fruits and vegetables posted monthly increases of 7.0 percent and 2.5 percent, respectively.

Core inflation, which filters the out the impact of food prices, rose by 5.8 percent on a year-on-year basis to April from 5.3 percent in March 2009. The sub-indices for Health and Housing posted year-on-year increases of 7.7 percent and 8.4 per- cent, respectively, somewhat higher than in recent months.

In April 2009, core inflation rose by 1.3 per cent from 0.1 percent in the previous month.

This surge in the monthly core inflation rate resulted, in large measure, from increases in the subindices for health (3.8 percent), recreation and cultural services (5.5 percent) and home ownership (1.6 per cent).

Net fiscal injections during the first half of the fiscal year 2009 were 24 percent higher than in the corresponding period of the previous fiscal year and this has impacted liquidity in the financial system. Liquidity continues to be quite high with excess reserves averaging close to TT$1.5 billion during the last two months. This build-up in excess reserve balances is partly reflective of the sharp contraction in bank credit expansion as consumers and business firms have adopted a more cautious approach to borrowing in the face of slower economic activity.

The recent issuance of a TT$300 million WASA five-year bond along with more intensified open market operations should assist in mopping up some of these excess reserve balances.

In the twelve months to March 2009, private sector credit by the consolidated financial system slowed to 3.1 percent from 8.4 percent at the beginning of the year and from 18.0 percent a year earlier. Consumer credit expansion also slowed sharply to 2.0 percent (year-on-year) in March 2009 from 3.4 percent in January and 18.4 percent in March 2008. Credit to businesses and lending for real estate mortgage loans have posted increases of 9.7 percent and 14.9 percent, respectively in the 12 months to March 2009.

The slowdown in bank credit expansion and the resultant increase in excess reserve balances held by commercial banks have served to depress short-term market rates.

The three month treasury bill rate declined to 2.50 percent in May 2009 from 6.22 percent in January 2009 resulting in a narrowing in the differential between short-term US and TT interest rates.

This differential declined to 230 basis points in May 2009 from 607 basis points in January 2009.

Monetary policy continues to face the dual challenge of containing inflation which remains stubbornly in double-digits while moderating the pace of the economic slowdown in the domestic economy.

Against this background, the Bank has decided to maintain the “Repo” rate at eight percent.