Fixed income monthly review

Published: Monday October 6, 2008

The Central Bank of Trinidad and Tobago (CBTT) targeted rate of inflation for 2008 is 6.00 per cent, however, in the recent announcement headline inflation, measured by the twelve month increase in the Index of Retail Prices, rose to 13.50 per cent Year-on-Year (YoY) in August, up from 11.90 per cent in July. 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 30.2 per cent YoY increase in the food sub-index, as compared to 25.30 per cent in the previous month. The main contributors have been the persistent increase in the prices of breads and cereals (62.60 per cent up from 60.30 per cent); oil and fats (31.10 per cent up from 27.20 per cent); meats (16.50 per cent up from 11.10 per cent); and vegetables (38.0 per cent up from 23.10 per cent). A significant increase in the vegetable component, YoY, was recorded on account of increases in tomatoes (77.00 per cent), melongene (149.00 per cent), cucumber (147.80 per cent), green pigeon peas (111.30 per cent) and bodi (109.30 per cent). It is noted that recent adverse weather conditions contributed in the significant increase in vegetable prices.

Core inflation (inflation ex-food prices) edged slightly upwards to 6.30 per cent (YoY), from to 6.20 per cent in July. This current rate of core inflation has all but quadrupled when compared to the core in 2004 of 1.57 per cent highlighting the significant increases in the cost of living over the four year period 2004 to 2007. Figure 1 below illustrates the persistent rise in the inflation rates since the beginning of the year.

Facing mounting inflationary pressures since the beginning of the year, the CBTT has taken several steps to control the rise in the price level, the bank has raised the Cash Reserve Requirement from 11.00 per cent to 15.00 per cent, and has increased the number of Open Market Operations to the tune of $7.5 billion in an attempt to absorb excess liquidity in the system. It was noted that both private sector credit and consumer credit have diminished; a sign that some of CBTT monetary policy measures have begun to take effect. However, with Government fiscal spending set to increase in 2009 there is anticipation that liquidity will further increase in the system.

The CBTT has intensified its liquidity absorption within the last month with the issue of a $700 million Housing Development Corporation bond which was oversubscribed. It was noted that another Government Bond will be issued shortly. In a further attempt to reduce inflationary pressures in the system, the CBTT increased the 'Repo' rate by 25 basis points (bps) to 8.75 per cent, as well as, indicating that it stands ready to utilise other monetary policy tools if the needed.

Interest Rate Report and Outlook

US$ Rates

The month of September, dubbed 'Black September' by some, was a traumatic month for the US financial system as legendary investment houses such as Lehman Brothers became a memory of the past, Merrill Lynch merged with Bank of America and the Fed injecting US$85 billion into a failing AIG. We also saw JP Morgan Chase acquiring most of Washington Mutual assets. The US Congress initially rejected the proposed US$700 billion financial market rescue package on September 29, causing a massive one day sell off in the US stock market sending the Dow Jones Industrial Average (the Dow) to its biggest one day plunge of 778 points. These recent events have added to the concern that the US recessionary trends would continue well into 2009 as there has been a structural hit to the financial system that would take time to be resolved. The Federal Reserve (the Fed) cut their benchmark interest rate seven times in the last year in an attempt to avert a US recession. However, in light of the existing conditions, interest rate futures suggested that there is a 75 per cent chance that the Fed will cut the benchmark rate to 1.50 per cent at their October 29 Meeting.

TT$ Rates

With inflation eroding the purchasing power of consumers' disposable income, the CBTT has embarked on taking the appropriate steps to control the supply of money in the local financial system. As a result of these actions, the Bank has effectively driven up the cost of credit in the local markets, with prime lending rate currently at 13.00 per cent. This had made it more expensive for consumers to purchase big ticket items, such as homes, and motor vehicles, with some being forced to forgo their planned purchases. An increase in the prime lending rate would also increase the borrowing costs by those who purchased variable rate loans and mortgages.

As indicated by the CBTT the market is still flooded with excess cash. As a result, this excess liquidity is driving deposit interest rates down slightly with 30 day and 60 day deposit earning 6.67 per cent and 6.86 per cent respectively, on average; as compared to 6.79 per cent and 6.93 per cent a month earlier. On the longer end of the curve however, investors can earn on average 7.27 per cent for one year deposits up 1 basis point.

TTD YIELD CURVE

As inflation trended upwards in August, the Trinidad and Tobago Bond Yield Curve shifted upwards as investors demanded to be compensated for a higher inflation premium.

The benchmark yields in constructing the curve were:

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=161384001