San­dra Chouthi

In­fla­tion is down. The pace of head­line in­fla­tion has de­clined from 2.7 per cent in Oc­to­ber to 1.5 per cent last month, the low­est rate since Oc­to­ber 1991. The in­fla­tion rate peaked at 15.35 per cent in Oc­to­ber 2008. It has fall­en steadi­ly since. The Cen­tral Bank, in is­su­ing its re­po rate re­port yes­ter­day, at­trib­uted the sharp fall in in­fla­tion to what it de­scribed as "a con­tin­ued slump in do­mes­tic pri­vate de­mand in 2009."

The bank said the con­trac­tion in con­sumer cred­it and lend­ing to busi­ness­es slow­ing sharply have con­tributed to the fall in in­fla­tion. "Pri­vate sec­tor cred­it by the con­sol­i­dat­ed fi­nan­cial sys­tem fell by 2.0 per cent on a year-on-year ba­sis to Oc­to­ber, fol­low­ing a de­cline of 0.4 per cent in the pre­vi­ous month," it said. "Con­sumer cred­it con­tract­ed by 3.1 per cent in Oc­to­ber fol­low­ing less pro­nounced de­clines in the pre­vi­ous two months, while lend­ing to busi­ness­es slowed sharply to 1.8 per cent in Oc­to­ber from 6.5 per cent in Sep­tem­ber."

Re­al es­tate

The Cen­tral Bank said, though, that re­al es­tate lend­ing "re­mained re­silient thus far" to the un­cer­tain eco­nom­ic en­vi­ron­ment, ris­ing by 10.6 per cent (year-on-year) in Oc­to­ber from 9.0 per cent in Sep­tem­ber. The bank said the re­duc­tion in cred­it ex­pan­sion, in com­bi­na­tion with high­er net fis­cal in­jec­tions, has been re­flect­ed in an in­crease in bank­ing sys­tem liq­uid­i­ty. "For the pe­ri­od Oc­to­ber-No­vem­ber 2009, ex­cess re­serves av­er­aged close to $3 bil­lion, three times more than the av­er­age for the cor­re­spond­ing pe­ri­od in 2008."

To treat with what the bank de­scribed as "per­sis­tent liq­uid­i­ty over­hang, the bank not­ed that in No­vem­ber, it re­quest­ed com­mer­cial banks to de­posit $2 bil­lion in in­ter­est-bear­ing ac­counts at the bank for a min­i­mum pe­ri­od of one year. "In­creased sales of for­eign ex­change al­so helped to drain ex­cess re­serve bal­ances from the fi­nan­cial sys­tem," the bank stat­ed. "In the up­com­ing weeks, ad­di­tion­al mea­sures will be in­tro­duced to ab­sorb ex­cess liq­uid­i­ty in the do­mes­tic fi­nan­cial sys­tem." The bank said high lev­el of ex­cess liq­uid­i­ty has helped to sup­press short-term in­ter­est rates, with the dis­count rate on the three-month trea­sury bill falling to 1.42 per cent in mid-De­cem­ber 2009 from 1.85 per cent in Sep­tem­ber.

"As a con­se­quence, the dif­fer­en­tial be­tween the TT and US 3-month trea­sury bill rates has nar­rowed sharply to 138 ba­sis points in mid-De­cem­ber from 173 ba­sis points in Sep­tem­ber," the bank stat­ed. "The per­sis­tent slow­down in the econ­o­my, against a back­ground of sub­dued in­fla­tion, pro­vides ad­di­tion­al scope for mon­e­tary pol­i­cy that is geared to boost­ing pri­vate sec­tor eco­nom­ic ac­tiv­i­ty. "Ac­cord­ing­ly, the bank has de­cid­ed to low­er its main pol­i­cy rate–the "Re­po" rate–by 50 ba­sis points to 5.25 per cent. "The bank will con­tin­ue to keep a close watch on eco­nom­ic de­vel­op­ments and stands ready to take ear­ly ac­tion to re­strain in­fla­tion­ary pres­sures if cir­cum­stances so war­rant."