Linda Hutchinson-Jafar, Business Writer

Ewart Williams, governor of the Central Bank of Trinidad and Tobago, warns that the payout to RBTT shareholders could add liquidity pressures.

Trinidad and Tobago's central bank governor Ewart Williams has warned the country to brace for higher inflation because of demand pressures, rapid credit rate expansion, volatile world food prices and poor performance of domestic agriculture.

"We are facing serious upside inflation risks. That's our situation," Williams said Monday at the launch of the Central Bank's latest Monetary Policy Report.

double digits

"After seeing inflation come down to 7.3 per cent in November 2007, we are again tottering on the brink of double digits and the risks are now on the upside."

Headline inflation peaked at 10 per cent in October 2006, but dropped back three points last year on the strength of tighter monetary policies, a series of government interventions to build out more competitive markets and a one-time reduction in tariffs.

But prices went north again December 2008, and were back at the 10 per cent level in January 2008, before dropping back marginally to 9.4 per cent in February.

Williams said attaining the government's end of year inflation target of 6.0 per cent would present serious challenges.

It is the bank's view, as outlined in the Monetary Policy Report, that managing demand pressures will require stronger monetary policy action and considerable tightening of public expenditure.

External factors

In a separate press conference, Finance Minister Karen Nunez-Tesheira, said rising inflation was linked more to external factors and consumer behaviour than government's development programme.

"A substantial part of inflation was driven by food prices," said Nunez-Tesheira.

"There's a tendency not to be discriminating and we see that in the kinds of bank credit expansion and borrowing. The level of consumerism and the change of taste...that's part of the difficulty."

The central bank also sees challenges ahead from new inflows - which it estimates could be as much as US$1.2 billion - when Royal Bank of Canada begins payment to RBTT shareholders under the US$2.2 billion cash and shares deal to combine banking operations.

Williams said the central bank, the Ministry of Finance and the Securities and Exchange Commission are planning to provide a number of alternative instruments to RBTT stockholders to sop up the additional liquidity, to prevent asset bubbles or further inflationary pressures.

"It's our view that we need to reduce the growth of public expenditure and I'm talking about central government and quasi-public spending," he said.

"To complicate this challenge, this may need to be done in the face of increasing demands for income transfers to the poor to deal with rising food prices and agricultural support programmes."

He also urged that a way be found to have a sustainable increase in agricultural production over the medium term.

"This is a daunting challenge indeed and raises the question whether a social contract involving government, business and labour is not a desirable framework for approaching these problems," he added.

Bank credit increased at a rate in excess of 22 per cent during 2007, according to the monetary report.

Consumer credit and real estate loans displayed the fastest growth, outstripping the rate of credit expansion to business firms.

Within consumer credit, loans for the purchase of motor vehicles increased by almost 50 per cent last year.

Retail sales

The index of retail sales also doubled, increasing by 20 per cent in 2007, and was led by motor vehicle purchases and spending on construction materials.

The tightening of liquidity in 2007 led to heightened activity in the inter-bank money market and increased recourse by commercial banks to the Central Bank's repo window.

The inter-bank rate increased from 6.82 per cent in September 2006 to 7.24 per cent by year-end.

Yields on three-month bills in the treasury bill auctions rose by 25 basis points to 7 per cent.

Commercial banks responded by adjusting prime lending rates from 11.75 per cent to 12.25 per cent.

The Monetary Report also showed that economic growth slowed to 5.5 per cent in 2007 from 12.2 per cent the precious year mainly as a result of a slowdown in crude oil production due to technical difficulties at state-owned Petrotrin.

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