LAST month, on June 24, the T&T Central Bank’s Monetary Policy Committee (MPC) announced that it had agreed to keep its repo rate at 3.50%, based on its assessment that ” domestic price impulses were currently generated externally”. and statistics on credit and real sector activity indicated a recovery that was underway but not yet firmly established. The repo rate is the overnight rate that the Central Bank charges commercial banks and it is used to signal to banks the direction of local interest rates.
The wording of the monetary policy announcement suggests to me that the Central Bank expects “domestic price impulses” to be less a function of imported inflation and more a function of domestic demand.
The Central Bank’s statement that “statistics on credit and real sector activity indicated a recovery that was underway but not yet firmly established” is also extremely telling. It indicates a willingness by Central Bank Governor Dr. Alvin Hilaire, who chairs the MPC, to wait until the recovery of the national economy is more firmly established.
On this question of the recovery of the economy “in progress but still to be anchored”, the Central Bank seems to be based on “the statistics of credit and activity of the real sector”.
T&T’s monetary authority credit demand assessment is broken down into business loans and consumer loans.
As for corporate lending, the Central Bank reports that it “continued to accelerate, increasing by 7.4% in March 2022, and driven by an increase in construction lending (17.5%) , manufacturing (12.3%) and ‘other services’ (10.9 percent) sectors.
Regarding consumer loans, the report states: “The decline in consumer loans appears to have bottomed out in March 2022, signaling that a return of consumer demand to pre-pandemic levels may be looming in the future. ‘horizon. In particular, credit card loan growth turned positive (0.8%) in March after falling since the start of the pandemic. »
In my opinion, the two sentences above indicate that the Central Bank has put a lot of emphasis on “returning consumer demand” in taking the decision to keep the repo rate at 3.50% in June.
This is remarkable as corporate lending grew by 7.4% in March 2022, but that was not enough to tip the Central Bank in favor of a repo rate hike.
According to the Central Bank, “a return to consumer demand may be on the horizon,” suggesting that it may not be on the horizon either. If the return of consumer demand is not on the horizon, the Bank would not want to be accused of adding further pressure on consumers by making them face higher interest rates on mortgages. , car loans, education loans and credit card loans.
It’s a reasonable, even compassionate thought, given that many T&T consumers have been bludgeoned by the impact of Covid-19 on their livelihoods in 2020 and 2021, and the impact of rising oil prices. fuel, food and cement in 2022.
What’s on the horizon that could lead to “consumer demand returning to pre-pandemic levels?”
It seems clear that wage negotiations between the Chief Personnel Officer (CPO) and public sector unions can contribute to “a return of consumer demand to pre-pandemic levels”.
The CPO is negotiating revised terms and conditions for around 90,000 civil servants, who are represented by 11 public sector unions.
Referring to the second offer made by the CPO in its negotiations with the unions, the Prime Minister, Dr Keith Rowley, in his Labor Day message, said: “The offer has since been increased to 4% on a six-year period 2014-2019. , which will cost the government $2.5 billion in back wages through June 2022, and pledge to pay an additional $500 million, per year, just for the civil service, the teaching service, the forces defense, protective services and daily workers,” he said.
“To this must be added the cost of a salary increase for statutory authorities and state-owned enterprises, which will increase the total cost of a 4% increase up to a further 50%. If negotiations were to settle at 8%, those numbers would literally double, bringing salaries to over $5 billion and annual recurring costs to over $1.5 billion.
It is not impossible that the final public sector wage increase figure agreed by the CPO, which takes its instructions from the Minister of Finance, is 8%.
What would be the consequences if public sector employees received $5 billion in back wages and monthly increases in wages and allowances equivalent to an additional $1.5 billion per year?
If the past is any indication, a large percentage of the arrears, if paid in cash, will be used to pay off existing debt. But a significant percentage of the backlog will also be used to replace items in the households of officials who have highlighted their usefulness. In other words, expect the arrears to be used to replace eight-year-old refrigerators, stoves, washing machines, televisions and vehicles.
It is therefore clear that the settlement of public sector wage negotiations could signal “a return of consumer demand to pre-pandemic levels”. This is especially the case if the country’s traders do as in the past and offer refrigerators, stoves, washing machines, televisions and motor vehicles at reduced prices.
In its June monetary policy announcement, the Central Bank said: “Headline inflation rose to 5.1% (year-on-year) in April 2022, from 4.1% a month earlier. Food price inflation rose from 7.9% to 8.7%, reflecting higher prices for rice, margarine, edible oils and meat. Core inflation (which excludes food) rose to 4.1% from 3.2% the previous month, partly due to the adjustment in domestic fuel prices. Construction material prices also showed relatively large increases based on available data, especially on imported components.
It is also worth noting that in last month’s monetary policy announcement, headline inflation of 5.1% and food inflation of 8.7% were figures for April 2022 and do not include the last month’s increase in the price of flour and flour products.
The point is, if prices in the country rise at a faster rate than they do now when public sector wage negotiations are over, what will be the cumulative impact on the T&T inflation rate?
Will Central Bank Governor Alvin Hilaire wait until September 30, the date of the next monetary policy announcement, to announce a T&T interest rate hike?
Until then, would “impulses towards domestic prices” be more internally generated?