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Prices
decline in December amid lower prices in transportation and food,
prompting the Central Bank to cut interest rates
In December, consumer prices dropped 0.44%. The price decline exceeded
expectations of Consensus Forecast panellists, who had anticipated no
change in consumer prices in the final month of the year. The drop was
broad-based, but most pronounced in those price categories, which
constituted the main drivers in 2002. Transport prices dropped 1.6% and
accounted for more than half of the price decline; food prices also
contributed to the downward trend, declining 0.6% over the preceding
month. The decline in food prices was mainly due to lower prices for fresh
fruits and vegetables. In the final month of the year, the price index for
fresh fruits and vegetables dropped almost 8%, attenuating the annual
increase, which in November exceeded 20% to “only” 16.8% in December.
Fuels exhibited a similar development if only of a lower magnitude. In
December, the price index for duels dropped 3.44%, lowering the annual
increase from 12.0% in November to 11.3% in December. As a result of the
December price movements, annual headline inflation dropped to 2.8% from
3.0% in November, whereas core inflation remained unchanged at 1.8%. Given
the benign inflation development, the Central Bank has decided to cut
interest rates yet again. In its regular monthly policy meeting on 9
January, the board surprisingly lowered the monetary lending rate by 25
basis points from 3.0% to 2.75%, a new historic low. The Central Bank said
that inflationary pressures remain subdued and that inflation is likely to
drop to the lower limit of the inflation target range of 2.0% to 4.0%
before rising again to 3.0%. Consensus Forecast panellists expect a
flatter development of consumer prices but coincide with the Central
Bank’s medium-term outlook and see inflation ending this year at 2.8%,
rising slightly to 3.0% by the end of 2004.
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