Tuesday 14 July, 2020

Central Bank maintains 5% Repo Rate

The Central Bank has maintained the repo rate at five percent in its latest Monetary Policy Announcement.

The repo rate is the rate at which a country’s central bank lends money to commercial banks in the event of any shortfall of funds. The repo rate is used by monetary authorities to control inflation.

The Central Bank noted positive developments in the local economy, particularly in the energy sector.  

Activity in the energy sector continued to pick up in the second quarter of 2018, while natural gas production benefitted from the implementation of the Juniper project with positive spillovers to methanol output.

The Central Bank noted a reversal of the trend of falling cement sales based on recent data, but said it is too early to tell whether this indicates the beginning of recovery in construction and in the non-energy sector.

Price pressures stayed well contained, with headline inflation registering 1.1 per cent in August 2018.

Private sector lending continued to grow in 2018, reaching 7.1 per cent in July (year-on-year).

The Central Bank said, however, that this reflected loans for refinancing and debt consolidation, with credit to businesses rising by a more modest 2.7 per cent.

In the first half of the year, there was a 1.2 per cent decline in the interest spread of commercial banks, the result of a simultaneous decrease in the average lending rate alongside a rise in the average deposit rate. 

In the third quarter, following the increase in the Central Bank’s repo rate in June, initial evidence indicates transmission to other rates—with announcements by some banks of increases in their prime lending rates as well as higher term deposit rates.

There was a widening of the negative differential between Trinidad and Tobago and US three-month treasury yields over the third quarter from -83 to -86 basis points, which the Central Bank said is the result of faster increases in US yields on these instruments.  

A temporary spike in excess reserves of commercial banks at the Central Bank in July-August in the context of widespread investor interest in a public sector bond arrangement was also noted.

The Central Bank’s removal of the two per cent secondary reserve requirement on banks’ deposit liabilities in August also boosted liquidity.

The action was in keeping with the Bank’s objective to progressively rely on more market-based policy measures, including open market operations. 

Meanwhile, rising trade tensions threaten the medium-term growth outlook, and the resumption of interest rate rises in the United States (US). The prospect for further increases will affect international financial markets in coming months.

Uncertainty around Brexit and the escalating tariff war between the US and China heighten downside risks to the forecast despite global growth projections at 3.9 per cent for 2018 and 2019 made by the International Monetary Fund in its July 2018 update.

Moreover, following a mid-year pause the US Federal Reserve raised its benchmark rate to between 2.00-2.25 per cent on September 26, 2018. 

In its deliberations, the Monetary Policy Committee (MPC) took note of the domestic situation, including the growth that remained concentrated in the energy sector, the low inflation numbers and the gradual transmission of the June 2018 repo rate increase.

The Committee also observed the ongoing normalisation of monetary policy in the US and wider trade and growth developments.

The MPC in considering all factors decided to maintain the repo rate at five per cent.

The Bank says it will continue to carefully monitor and analyse international and domestic developments.

The next Monetary Policy Announcement is scheduled for December 28, 2018.


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