BoB revives year-end inflation target

Brian Benza
Staff Writer | Tuesday August 28, 2012 00:00

 

After initially targeting the second half of 2012 for inflation to fall within the range, the BoB has in the past four months seemingly avoided to commit to inflation targeting preferring to say, in its regular market updates, that inflation will fall within the range in the medium term.

However, in a mid-term monetary policy review statement released yesterday, the bank says despite the anticipated inflationary pressures including a possible power tariff increase before the end of September, inflation should trend down towards the upper end of the objective range before the end of 2012.

 'The announced increase in administered prices is estimated to add 1.25 percentage points to inflation in the short term, with most of the effect dissipating in the first half of 2013. The increase in fuel prices in May 2012 initially added 0.44 percentage points to inflation, while the upward adjustment of water tariffs added 0.38 percentage points to inflation in May. The projection also includes a possible increase in electricity tariffs in the third quarter of 2012, which will initially add around 0.43 percentage points to inflation. Although the impact of this year's price increase will continue into 2013, the effect of the earlier price adjustment is such that inflation will fall within the objective range towards the end of 2012,' reads the statement. 

Domestic inflation trended downwards in the first half of 2012, falling from 9.2 percent in December 2011 to 7.3 percent in July 2012.

In the statement, the central bank says aggregate demand was suppressed in the first six months of the year, as domestic economic activity was below-trend leading to softer demand-pull inflation.  Among the main contributors to the softening inflation was the restraint in household demand due to weak growth in incomes leading to less pressure for prices to go up.

A subdued government expenditure in the current financial year also contributed to the weaker demand inflation through less economic activity.

However going forward, the bank says upside risks to the inflation outlook include any substantial increase in administered prices and government levies, as well as any increase in international oil and food prices beyond current forecasts. However, inflation could be positively affected by a further slowdown in global economic activity, the bank adds.

Last week the central bank left its main lending rate unchanged at 9.5 percent, saying this was consistent with bringing inflation back to target while helping spur economic growth.