Inflation inching upward.  In May, consumer prices increased 0.21% over April, taking the annual inflation rate to 3.6%, a notch higher than the month before.  Fuel prices continued to play a significant role in the price increase (+2.0% over last month).  However, May price increases were mainly driven by price hikes in housing, which accounted for more than half of the increase. 

Guidelines for monetary policy.  In its recently published report on monetary policy the Central Bank outlined its guidelines for the next two years.  The Bank aims for a 3% inflation rate at the end of 2001 with the previously announced range between 2.0 and 4.0%.  More important for the shorter term, is the announcement to concentrate on the core inflation (i.e. to exclude fresh fruits, vegetables and fuels) as the central guideline for monetary policy, in order to counteract only those price pressures that are of permanent nature. 

Year-end inflation beyond 4% mark.  Since effects of the recent oil price increases continue to feed through the economy, the Bank expects core inflation to reach 3.6% (quarterly average) in Q4 2000, which corresponds to a CPI of 4.2%, dropping to 3.2% (CPI: 3.7%) in Q1 2001.  Panellists have reacted to the announcement by further revising their year-end inflation forecasts upwards from 4.0% last month to currently 4.1%.

Interest rates unlikely to rise.  In the short term the Central Bank is unlikely to raise interest rates.  Given the current core inflation levels (May: 2.7%) and taking into account that domestic demand has not yet reached the peak levels anticipated in the report, the monetary authority is under no pressure to tighten.  Furthermore, the Bank indicated that restrictions on domestic demand, such as slow recovery of investment, higher relative household debt, more costly external financing as well as a more restrictive fiscal policy could be compensated by “monetary conditions that are somewhat more expansionary than in the past decade”.  In its recent monetary report the Central Bank expects to maintain its benchmark interest rate at its current level of 5.5%, which currently corresponds to a market rate for 90 day PRBC of 5.81%.  Consequently, the monetary authorities decided to leave the rate unchanged at its last meeting on 8 June.  Panellists maintain their year-end forecast of 6.1%.

Surplus in current account.  The current account registered a surplus of US$ 496 million in the first quarter, exceeding by US$ 100 million the 1999 figure for the same quarter.  The improvement in the current account is mainly attributable to a growing trade balance surplus.  However, in April the trade balance registered the first deficit since August 1999 after significant and rising surpluses in the last months.  The shift is the direct result of mushrooming imports (+36.7%) and a collapse in exports, which decreased 4.1% year-over-year following a healthy 23.7% expansion in March.  While the imports boost was mainly driven by increased consumer goods purchases, capital goods imports also began to pick up.  Exports suffered from lower copper prices while volume continued to grow.

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