Fixed income review

Published: Monday September 8, 2008

Central Bank Announcement

The Central Bank of Trinidad and Tobago (CBTT) announced on August 29 that headline inflation, measured by the twelve-month increase in the Index of Retail Prices, rose to 11.90 per cent Year-on-Year (YoY) in July, up from 11.30 per cent in June. On a monthly basis (MoM), headline inflation increased by 2.30 per cent for the month of July, the highest monthly increase for the year. As was the case in the previous months, the CBTT indicated that the food sub-index was the main driver for the increases in headline inflation; in July there was a 25.30 per cent YoY increase in the food sub-index, as compared to 23.10 per cent in the previous month. The main contributors have been the persistent increase in the prices of breads and cereals (60.30 per cent up from 43.00 per cent)-mainly due to the higher prices for packaged rice (81.90 per cent), and flour (88.30 per cent); fruits (49.50 per cent up from 37.80 per cent), oil and fats (27.20 per cent up from 23.90 per cent); meats (11.10 per cent up from 10.80 per cent); and vegetables (23.10 per cent).

Core inflation (inflation ex-food prices) did in fact edge downwards to 6.20 per cent (YoY), from to 6.40 per cent in June. This current rate of core inflation compares with rates of between 2.00 per cent and 3.00 per cent over the 2003-2005 period, and highlights the significant increase in underlying inflationary pressures over the past three years. The CBTT noted that this surge in core inflation is related to the sharp increase in economic growth which has taken place against the background of declining spare capacity, growing fiscal pressures and booming private demand supported by rapid bank credit expansion.

The Bank stated in their announcement that inflation management is likely to continue to be a major challenge in the coming months; as the outlook for global energy and food prices continue to trend upwards, especially as recent flooding in the country could place upward pressure on the prices of agricultural commodities. In light of these circumstances the CBTT cited that workers may start demanding higher wages.

On July 25 the CBTT decided to utilise the full range of Monetary Policy Tools at their disposal, increasing the 'Repo' Rate, by 25 basis points from 8.25 per cent to 8.50 per cent, increasing the Cash Reserve Requirement from 13.00 per cent to 15.00 per cent, and the usage of Open Market Operations to mop up excess liquidity. They noted that there might be a time lag before the full effects of measures are realised; however recent data revealed that private sector credit growth decreased to 13.30 per cent in June from 18.00 per cent in March. Consumer credit growth also decreased from 20.00 per cent in the first five months of 2008 to 16.40 per cent in June.

Following the July increases, the current situation has encouraged the CBTT to maintain a Repo Rate of 8.50 per cent at its subsequent meeting, stating that they will keep economic and monetary conditions under review, and that any further tightening in their monetary policy will depend on global food and energy price developments, wage and salary adjustments and the evolution of the fiscal policy stance.

Interest Rate Report and Outlook

US$ Rates

Recent economic data revealed that the US unemployment rate jumped to 6.10 per cent up from 5.70 per cent on September 5, the highest level in five years as the world economy slows. The unemployment data came on the heels of the worst week for global equities since the September 11 2001 terrorist attacks. The Standards & Poor's 500 (US benchmark index) lost 4.00 per cent for the week ending September 5 and is down 16.00 per cent for the year. These recent events have added to the concern that the US is suffering from the worst housing slump since the Great Depression (1929-1939) and over $500 billion in credit losses and write downs, which analysts say, is dragging the US into a recession. The Federal Reserve (the Fed) cut their benchmark interest rate seven times in the last year in an attempt to avert a US recession. Under the existing conditions, interest rate futures suggested that there is a 100 per cent chance that the Fed will leave the benchmark rate at 2.00 per cent at their September 16 and October 29 Meetings. The European Central Bank and the Bank of England both left their benchmark rates unchanged on September 4 at 4.25 per cent and 5.00 per cent respectively, leading to further dollar appreciation.

Locally, rates on US Dollar Deposits edged upwards; on average rates offered by commercial banks on 30 day US$ deposits would earn investors 1.94 per cent, 90 day US$ deposits would earn investors 2.20 per cent, while the one-year deposits would earn 2.70 per cent on average. Once again US Dollar Money Market Mutual Funds offered the highest rate of return for investors with some funds offering between 4.00 per cent and 6.10 per cent on US$ deposits.

As economic data and news out of the US indicates that all is not well with the US economy, as they struggle to cope with evidence of a recession. With inflation rates projected to trend downwards as global commodity prices continue to fall. We agree with the reading of interest rate futures and expect that the Fed will maintain at rate of 2.00 per cent to 2.25 per cent throughout the year and into the first quarter of 2009 as the Fed attempt to stimulate growth in the US economy.

TT$ Rates

As inflation continues to spiral upwards and the CBTT taking the necessary measures to curb inflation, consumers continue to feel added pressure as their disposable income struggle to cope with rising prices.The cost of borrowing has also increased because of the Banks initiatives, with the prime lending rate at 12.75 per cent up from 12.25 per cent making its more expensive for consumer purchase, with some even forging their planned purchases. In light of these circumstances consumers are eagerly awaiting the next Fiscal Budget presentation to gain some insight as to what Government's expenditure would entail in the next fiscal year, as it is largely regarded at one of the main drivers of the current inflation rates.

Our market reads suggests that local market deposit rates are shifting upwards in the short term liquidity with 30 day and 60 day deposit earning 6.79 per cent and 6.93 per cent respectively on average as compared to 6.68 per cent and 6.90 per cent a month earlier. On the longer end of the curve investors can earn on average 7.26 per cent for one year deposits down 2 basis points.

TT$ YIELD CURVE

Even as inflation edged upwards in July, the Trinidad and Tobago Bond Yield Curve remained relatively unchanged from the previous month where the shorter end of the curve adjusted downwards slightly in light of prevailing liquidity conditions. The longer end of the curve adjusted upwards as investors demand a higher inflation premium.

Note: Yields were determined by market reads based on the GOTT quotes of two major local banking institutions, a large insurance company and Bourse.


Source: Trinidad Express Newspapers
http://www.trinidadexpress.com/index.pl/article_business?id=161373080