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Rate remain at historical lows but
inflation bout likely to prompt monetary tightening
In March, the Central Bank lowered the benchmark DTF interest rate by 14
basis points to 7.68%. The Central Bank remains firm in its intention to
keep interest rates at current historical lows in order to foster a
recovery in economic activity. Officials so far have decided to use
exchange rate stability via foreign exchange market intervention rather
tighter monetary policy as the means to address rising inflationary
expectations. Nevertheless, Consensus Forecast participants expect
officials to tighten monetary reins throughout the year, with the DTF
interest rate seen rising. As pace of economic activity accelerates next
year, inflationary pressures are likely to prompt further Central Bank
tightening, since participants expect the DTF rate to rise further to
9.9%.
Current account deficit deteriorates
moderately as external sector rebounds late
In the fourth quarter, the current account balance incurred a deficit of
US$ 535 million. This was not only above the deficit incurred in the third
quarter of 2002 (US$ 406 million) but also exceeded the deficit of the
fourth quarter of 2001 (US$ 280 million). The increase in the deficit over
the prior year period was mainly attributable to a higher deficit in the
investment income account, amid higher net outflows from both the private
and the public sector. In addition, the trade balance reverted from a US$
79.2 million surplus fourth quarter in 2001 to a deficit of US$ 92 million
in the fourth quarter of last year. Exports were up 2.1% over the same
quarter in the prior year, as traditional export sectors of oil and coffee
received a strong boost, registering growth rates of 39.9% and 2.7%
respectively over the fourth quarter 2001. However, robust import growth
of 8.2% for the same period offset the export sector pickup, amid double
digit growth in imports of consumer and intermediate goods. The capital
account surplus in the final quarter last year (US$ 493 million) virtually
covered the current account short-fall but represented deterioration
versus the same quarter in 2001, when the surplus had reached US$ 755
million. For the year 2002 as a whole, the current account registered a
US$ 1.6 billion deficit (equivalent to 2.0% of GDP), which was only partly
offset by a US$ 1.2 billion surplus in the capital account balance.
Consequently, international reserves dropped US$ 138 million in 2002,
according to the balance of payment data. This year, Consensus Forecast
panellists expect the current account deficit to widen further over last
year’s level.
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