CONTINUOUS inflation expectations in the United States could force the Central Bank of T&T to balance higher local interest rates against the need to support the recovery of the local economy, the bank said.
In an analysis published in its November 2021 Monetary Policy Report, the Central Bank indicated that favorable financial conditions would be needed to support private and public fundraising efforts.
“Considering that many of the measures announced are aimed at increasing the country’s production capacity in the medium to long term, abundant liquidity and relatively low interest rates would be needed to support the government’s financing activities,” said the Minister of Finance. Central Bank, adding that the main downside risk lies in the potential monetary policy actions of advanced economies.
But the Bank noted that if inflation proves to be more sustainable in the United States and inflation expectations lose their anchor, the Federal Reserve may have to tighten interest rates sooner than expected. This could lead to higher borrowing costs in international financial markets and generally tighter financial conditions.
“At the national level, this has implications for capital market activity, system liquidity and the term structure of interest rates. Monetary policy may need to offset the threat of higher inflation, maintaining favorable financial conditions while continuing to support the nascent economic recovery, ”the Bank said.
He stressed that the balance between the threat of higher inflation and the need to support the recovery of the economy “is likely to involve trade-offs and will require the Central Bank to communicate effectively its objectives and actions. monetary “.
The Central T&T Bank said several of the policy measures announced in the 2022 budget could have direct and indirect effects on the country’s inflation rate.
I discussed the potential implications of the measures announced in the budget for monetary policy, which include the impact of the rate of inflation on money supply and interest rates.
The Bank said the size of their impacts will depend on the relevant weights of the relevant items in the Retail Price Index (RPI).
The central bank said, “The most immediate and direct impact on the RPI will come from the transmission of measurements to the food and non-alcoholic beverages and transport sub-indices.
“The expansion of the list of value added tax (VAT) at zero rate (on items such as cookies, cooking oil, canned vegetables, cornflakes, canned fish, meat canned curry, juice, sausage, ham, ketchup, bottled water and pigtail) can help contain food price inflation if retailers reduce their prices in line with the fiscal policy.
“However, the possible moderating effect on food inflation can be offset if the current surge in international food prices and global logistical challenges, such as the critical shortage of shipping containers, continue into 2022.”
The Central Bank estimated that the announced fiscal measures could affect the transport sub-index in different directions – the removal of tariffs, motor vehicle tax and VAT on battery-powered electric vehicles, could have a downward influence on the prices of new and foreign products – used vehicles.
“On the other hand, in an environment of rising fuel costs, further liberalization of the fuel market could have the opposite effect, by increasing transport costs through various channels such as higher maxi / taxi fares,” he said. the report said, adding: “The net impact on prices within the transport sub-index will therefore depend on the margins set by the retailers.
In the presentation of the 2021 budget, the Minister of Finance, Colm Imbert proposed a series of reforms aimed at liberalizing the fuel market.
He proposed the removal of fixed retail margins for premium gasoline, premium gasoline and diesel, with petroleum retailers and dealers being allowed to set their margins for these petroleum products.
The proposals included maintaining the wholesale margins set by the government for all liquid petroleum products and the government setting a retail margin cap for each petroleum product to minimize price fluctuations and protect end consumers of premium gasoline. , super gasoline and diesel.
It has also been proposed that the Department of Energy post market-based wholesale prices for premium gasoline, super gasoline, and diesel on the first day of every month, with the exception of the price of kerosene and gasoline. liquefied petroleum (LPG) which will remain under the subsidy mechanism.
Legislation to bring the liberalization of fuels into effect was sanctioned on July 14, 2021.