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Consumer prices rise moderately but remain contained amid stronger
exchange rate
In February, consumer prices rose 1.20%, which was up from 0.89% observed
in the prior month and was on par with the monthly variation observed in
February of last year. Seasonal factors, such as rising education costs
associated with the new school year and higher food prices, were key
drivers behind the February increase in consumer prices. As a result the
February spike, the annual inflation rate rose from 6.2% in January to
6.3%. Producer prices, on the other hand, experienced a more moderate
increase of 0.96%, up from the 0.69% increase observed in January.
Nevertheless, the annual variation in producer prices dropped to 5.0% from
5.3% in the previous month. The current strengthening in the exchange
rate is likely to help maintain inflationary pressures at bay but if
domestic demand continues to pick up at its current pace, then consumer
prices are likely to experience some upward momentum in the coming months.
However, Consensus panellists anticipate annual inflation to drop to 5.8%
by the end of the year, which is up 0.1 percentage points from last
month’s estimate. The current Consensus Forecast figure is within the
Central Bank’s 5% to 6% target range for this year. Furthermore, next
year, Consensus Forecast participants expect annual inflation to moderate
and end the year at 5.4%, which is at the upper end of the monetary
authorities’ official target range of 3.5% to 5.5% and has been revised
upward 0.1 percentage points from last month’s Consensus Forecast figure.
Central bank cuts rates further amid exchange rate appreciation
On 20 February, the Central Bank cut its central intervention rates by 25
basis points – the first cut since 2002. The monetary policy move brought
the Central Bank’s minimum repurchase agreement rate to 7.0%. Monetary
authorities said that the declining inflation trend, dropping inflationary
expectations and a strong exchange rate warranted a cut. As a result, the
benchmark DTF interest rate also dropped from 7.99% at the end of January
to 7.70% at the end of February. The declining interest rate trend is
likely to give an additional push to the already burgeoning economy, as
businesses and consumers alike step up activity to take advantage of lower
rates. However, rates are seen to rise throughout the year amid the more
accelerated growth path, with the DTF rate rising to 8.5% by year-end.
The persistence of strong growth next year is anticipated to prompt
Central Bank officials to tighten monetary policy further, as the
benchmark interest rate will rise to 9.1%, which is up 0.2 percentage
points from last month’s Consensus Forecast. |
