Central bank watching inflation pressures

Central Bank Governor Ewart Williams says the Central Bank will  take whatever steps necessary to keep inflation down. The bank’s target is keeping it at 4-5 percent range, Williams said at a Central Bank press briefing to discuss the economy. Core inflation, one that excludes the impact of food prices, was 1.6 percent in 2004, the same as in 2003. But Williams says he is wary of large government projects carded for this year could put on inflation rate. He is also wary that of the psychology of inflation arising from skyrocketing food prices. “Expenditures over and above budget could add to inflationary pressures,” he said. 

In the bank’s  Economic Outlook for 2005, Williams identified large projects by the Water and Sewerage Authority (WASA) and other quasi-government bodies, which, he said, could “put pressure on financial markets and complicate fiscal and debt management.” The projects are to be largely financed by domestic resources. The bank’s  forecast stated that the budget for 2004/05 envisaged an overall surplus of 1.6 percent of GDP, based in part on a containment of expenditures. Preliminary data for the first quarter show that expenditures are currently running below budget projections. Williams said since the budget was approved,  a number of additional expenditure commitments have been announced, “which could present challenges for the attainment of the original budget target,” the Central Bank report warned. And while inflationary pressures could be expected to remain acute this year, the impact of some end-of-year adjustments in basic food prices could play out in early 2005.

“Clearly inflation has been rising in the last quarter of 2004,” he said at the briefing held at Central bank, noting that it had always indicated that inflation was something that it was monitoring closely. He said because inflation is being led by food prices, it might be a short-term phenomenon and reminded that core inflation was under two percent. “It means that the underlying measure of demand in the system suggests that things are basically under control,” he noted, adding that there was clearly all sort of influences on food prices that resulted in a sharp spike in 2004. Does it mean that if there is another flood and vegetable prices double and that pushes the inflation rate up, we are going raise interest rates sharply ? No, he said, noting that rising food prices was something that one had to keep looking at to see whether this thing is reversible. 
 
“There comes a time,” he said, “when the increase in food prices become ingrained enough that people’s expectations of inflation is that it will continue going up.” “If there is need to break the inflationary psychology by increasing interest rates, then one has to do it,” he said. ‘W are going to make sure that we sterilise excess liquidity in a way that is consistent with meeting the inflation target,” he said. He said it simply means that, “If we reduce the reserve requirement and if there is need to raise interest rates, we simply have to sterilise the mood.” The Central Bank report also noted that  “the pick-up in domestic demand, declining spare capacity and increasing fiscal expenditures could also create challenges for inflation containment.

Meanwhile inflation in 2004, as measured by the annual average increase in the Retail Price Index, (RPI) was 3.8 percent, or pretty much the same level as in 2003. However, the bank’s report pointed out that “inflation picked up sharply in the latter part of the year, fanned by a sharp rise in food prices. On a year-on-year basis (Dec/Dec) the increase in the retail price index was 5.6 percent and the year-on-year increase in food prices reached 21 percent as at December 2004.”