Monetary policy report: Non-energy sector boosts real GDP

The Central Bank of TT’s monetary report for November indicated real GDP improvements in the first quarter of 2024 owing to growth in non-energy sector activity and marginal expansion in the energy sector which has seen a decline in output.

The report also noted a decline in core inflation with domestic prices decelerated to 0.2 per cent in October, from 0.7 per cent in June. While inflation is expected to remain contained, domestic and international factors can still affect prices. Conflicts in the Middle East, supply chain disruptions from strikes at US ports, industrial action at local ports and climate events are all factors being monitored by the Central Bank to guide the development and adjustment of monetary policy.

High government borrowing and robust credit growth caused a decline in financial system liquidity with excess reserves declining from $4.2 billion in May to $3.4 billion in July. But the shift in global monetary conditions is expected to bode well for Emerging Market and Developing Economies (EMDEs) as currencies strengthen against the US dollar, imported inflation eases and financial conditions improve. EMDEs, including Latin America and the Caribbean, are anticipated to be the engine of global growth, expanding by 4.2 per cent in 2025.

The report said, “With the reduction of benchmark interest rates in several major AEs (advanced economies), capital inflows into the EMDEs rebounded and are likely to pickup as global monetary conditions soften.”

Globally, economic activity appears to be stabilising despite the lingering effects of past shocks and the emergence of new challenges. Ongoing geopolitical conflicts coupled with trade and competition tensions threaten to deepen geo-economic fragmentation among key economies. And with the possibility of a shift towards restrictive trade policies by the US, the BRICS+ (Brazil, Russia, India, China, and South Africa) trading bloc continues to discuss de-dollarisation efforts and the development of a payments platform among its member countries. These discussions seek to facilitate trade and lending in national currencies, thereby reducing reliance on the US dollar.

While global inflation continues to decelerate, the pace is slower than initially anticipated. According to the report inflation continues to remain uncertain around monetary targets in AEs forcing their central banks to remain cautious about initiating monetary policy easing. But in the third quarter of 2024 the Fed (Federal Reserve), the BoE (Bank of England) and the ECB (European Central Bank) lowered their benchmark interest rates citing softer inflation and economic data.