CMMB predicts 16 per cent inflation by year-end

Caribbean Money Market Brokers Ltd (CMMB) has predicted that inflation will hit 16 per cent by the end of the year.

In a press statement commenting on the rise of inflation to 13.5 per cent, CMMB said it had raised its inflation forecast for the rest of this year.

“We hold the view that inflation has not yet peaked and will continue to edge upwards in the coming months, likely to end 2008 in the range of 14.5 to 16 per cent, with a bias to breach the upper end,” the brokerage house said in the statement.

It said that a number of things would contribute to maintaining a high inflation rate:

    • The impact of the 33 per cent increase in the price of premium gas. CMMB said this would affect transportation, distribution and general cost of production for companies.
    • Increase in food prices due to crop losses from flooding and bad weather.
    • Continued high liquidity in the financial system due to sustained high government spending.
    • Further inflationary pressure from Christmas spending.

It said that, “Going into 2009, it is likely that we will see the re- emergence of higher wage negotiations, as inflationary pressures continue to erode current wage levels and fuel inflationary expectations. This could have the effect of creating a wage spiral, where increased wages translate into a higher cost of production for firms which will ultimately be passed on to the consumer.”

CMMB predicted that the quarter per cent increase in the Repo rate, announced by the Central Bank would not have the intended effect on the financial system, because of the liquidity overhang which exists.

“Currently, the Repo rate is higher than the weighted overnight interbank rate. This means if banks need to meet liquidity requirements, they can borrow at a much lower rate from other banks than from the Central Bank, rendering the Repo rate ineffective. Evidence of such excess liquidity can also be seen in the fact that banks have not been increasing deposit rates although this would be a cheaper source of funding for them. Any increase in bank lending rates is due more to voluntary action by the commercial banks than to changes in the Repo rate.”

CMMB added that while international commodity prices for such products as corn, wheat, rice and milk had fallen significantly in the past five months, “we have not seen this translated into lower prices on grocery shelves, indicating that mark-up inflation is the more significant contributor to high prices with these items in particular.”