The Central Bank of Trinidad and Tobago (CBTT) is holding its repo rate at 3.5 per cent going into a third-straight year despite the International Monetary Fund (IMF) urging it to consider increasing the policy rate to temper inflationary pressures.

On Friday the central bank announced that its monetary policy committee (MPC) “agreed to maintain the repo rate at 3.50 per cent” taking into consideration a number of factors including a deceleration in inflation since the end of 2022.

“In reviewing external developments, the MPC took particular note of the recent banking problems and the potential repercussions on global financial stability. While domestic inflation had shown signs of slowing down, the MPC acknowledged that unanticipated external impulses and second-round effects of the adjustment to local fuel prices could temper further reductions in inflation in the short run,” the CBTT outlined in its release.

Inflation in Trinidad and Tobago decelerated slightly between December 2022 and January 2023 with the Central Statistics Office noting a fall from 8.7 per cent to 8.3 per cent. However, food inflation stood at 17.3 per cent while core inflation — which excludes food prices — declined from 6.7 at the end of 2022 to 6.1 per cent at the end of January.

The CBTT noted that core inflation fell on account of an ease in the price increases for housing, communication and furnishing, as well as the slowing of the prices of building materials.

In addition to a deceleration in price increases in the local economy, the CBTT also shared that it anticipates that price increases globally will continue to ease, resulting in a reduction in imported inflation.

“With some of the supply-side impulses to inflation tapering off, there is an expectation that global inflation will moderate later in 2023,” the release from the central bank explained, adding, “Energy prices have already demonstrated some softening.”

Meanwhile, the CBTT remains wary of the levels of liquidity, partly due to an increase in the take-up of available credit from commercial banks, and its potential impact on fuelling further price increases.

“The current buoyancy in credit was welcome in fostering growth that was still at an early stage, but needed to be closely monitored given the implications for demand pressures and the quality of bank assets. The MPC also noted the impact that the bank’s recent open market operations had been having on financial system liquidity,” the bank stated.

At the same time, banks’ reserves at the CBTT have dipped by almost TT$500 million to around TT$6.2 as at March 28, 2023, compared to TT$6.7 million at the end of December 2022. To reduce this excess cash the central bank has tendered about TT$1 billion in treasury bills and sold foreign exchange in the amount US$300 million into the economy.

Notwithstanding these efforts to reduce the rate of price increases, the IMF has advised the CBTT to increase its policy interest rates in a statement following a visit from its staff to conduct Article IV consultations in Trinidad and Tobago between March 1 and 14.

“The CBTT has maintained its repo rate at 3.5 per cent since March 2020 to support the recovery of the economy. Increasing the policy rate should be seriously considered to contain inflationary pressures and narrow the negative interest rate differentials with the US monetary policy rate. This would also help mitigate potential risks of capital outflows and reduce incentives for excessive risk taking that could threaten financial stability,” the fund recommended in statement dated March 16, 2023.

Last month the US Federal Reserves increased its target range for rates federal funds to between 4.75 per cent and 5.00. While the CBTT acknowledges a negative differential between the rates, it said that interest rates have shown signs of increasing with credit growth to the construction and manufacturing sectors growing by 18 per cent and 11 per cent, respectively.

In February, during a JMMB Group investor briefing, head of JMMB TT Shawn Moses noted that CBTT had employed other measures than that recommended by the IMF to manage inflation.

“The central bank did employ various liquidity management measures, but in addition to that, we have to take into context the Trinidad market and the FX availability in the Trinidad space. So, I do think that has influenced the need to really match and manage the interest rates as the potential risk of capital flight where people would be converting those TT dollars to US dollars and placing investments elsewhere,” he said.

“That’s a bit more difficult to undertake in Trinidad. So, because of that factor, I do believe that has influenced the central bank to not aggressively or increase their interest rates at all, but rather employ other measures by which they would have managed the liquidity available and managed the inflation position,” he added.

The language of the CBTT release suggests that the institution is more concerned with economic growth than on inflation targeting as it highlighted an estimation of 2.2 per cent growth in 2022.

“This reflected a relatively favourable performance in the energy sector alongside a gradual revival in non-energy production. There is some early evidence of improving labour market conditions based on observed increases in labour force participation in the third quarter of 2022 and the decline in the number of persons retrenched during the second half of 2022,” the bank outlined.

“The outlook for 2023 looks favourable, barring external shocks,” it added.