Groan!
PRESSURE!
Central Bank warns of hard times ahead
Curtis Rampersad
Tuesday, April 22nd 2008
Turbulent times: Central Bank Governor Ewart Williams yesterday. -Photo: Dexter Philip
Trinidadians are in for turbulent financial times in the coming months and will pay more for food, goods and services amid the economic menace of escalating inflation.
"There is a very serious threat of double-digit inflation becoming an endemic," in Trinidad and Tobago, as well as countries around the world, Central Bank governor Ewart Williams said yesterday. "The global food crisis threatens price stability and all governments are scared about double-digit inflation."
Headline inflation hit ten per cent in January then fell to 9.4 per cent in February, but domestic inflationary pressures have remained strong and have been compounded by substantial increases in international food prices.
Williams said based on how organisations responded to inflation, it was "very easy" for the country to find itself in a spiral of continued escalating prices as a response to inflation.
He was speaking at the Bank's release of its Monetary Policy Report at the Central Bank tower, Port of Spain.
There are several structural reasons for the continued threat of higher inflation that cannot be easily resolved.
For instance, non-energy tax collections increased between 2003 and 2007, but government expenditure grew twice as fast over the same period.
Government spending is an issue and the Bank has a responsibility to inform the government of its concerns, Williams said, but admitted that as an adviser, the Bank could express its concern but this was not always heeded.
"Sometimes the advice is taken, sometimes it's not," he said.
Excessive consumerism is another factor contributing to higher inflation. Bank credit expansion added to demand pressures and increased more than 22 per cent last year, consumer credit and real estate loans expanded faster than business credit and loans for cars jumped 50 per cent in 2007.
Retail sales also surged by 20 per cent from 2007 and were led by car sales and construction material expenses, highlights of the monetary policy report showed.
Consumer spending may jump again in the coming months as the Royal Bank of Canada's takeover of RBTT Financial Holdings will inject almost $8 billion in cash into the financial system.
A third reason for what could be several months of high food prices is lagging agricultural output in the country, with the sector declining by six per cent last year.
This sluggish performance was caused by low investment, dislocation of Caroni (1975) Ltd and workers moving to other jobs.
Higher import prices also affected food inflation in the country.
Williams said three considerations added to the Bank's view about inflation-the view that food import prices rises were structural and unlikely to be reversed soon; delays in the implementation of Government's new agricultural thrust and a noticeable rise in inflation expectations driven by rising food prices.
"Unless something is done, we are going to be swimming in double-digit inflation," Williams told members of government bodies and the financial and business community.
This may be the time to consider some kind of social compact involving business, labour and government, while long-term measures take root, he said, adding that between the Bank and the government, initiatives to solve the problems could include national budget measures, monetary policy adjustments such as shifting the focus to absorb liquidity and implementing agriculture improvements.
The Bank has increased the repo rate and reserve requirements for commercial banks, thus forcing them to increase lending rates to curb borrowing.
But the situation remains tense for the country.
"Attaining the government's target inflation rate of six per cent by end-2008 will present serious challenges," Williams said. "We are facing a situation that could get out of control, that could easily slip away from us."
