FOOD PRICES CAUSING HEADACHE FOR CENTRAL BANK

Food prices have increased by 25.6 percent in one year, the highest increase in any 12 month period since 1989, Central Bank Governor Ewart Williams said yesterday.  He warned that this could “exacerbate inflation expectations.” According to the Central Bank, the latest Central Statistical Office (CSO) figures indicate that in the months to March 2005, inflation measured 7.3 percent, compared with 2.8 percent a year earlier. Asked if this was worrying, the Governor said he did not think so. At a press conference at Central Bank on Independence Square, where the Monetary Policy Report to April 2005 was presented, Williams described the rise in food prices as a “structural issue” and ruled out using interest rates to control the increase.

To deal with spiraling food prices, he said there was need to increase local agricultural output. Williams said the custom for most countries was to use monetary policy to target their core inflation rates or inflation, which excludes food prices. “You can’t raise interest rates to deal with increase in vegetable and food prices,” he told reporters. “The injudicious use of interest rates can be self-defeating.” Core inflation, which excludes the volatile movement in food prices, rose by 2.8 percent in the 12 months to March 2005. He warned that there were signs of an “inflationary expectation” and noted that rising inflation rates could become a self-fulfilling prophecy. “More and more people are beginning to feel that inflation is increasing,” he said.

He also said that other issues were complicating inflation rates, and pointed to the increase in Government’s public sector spending in construction. “Be careful of how this expenditure is paced,” Williams said of the heightened construction activity, stressing that “this was important to contain demand pressures. “The projected rise in public sector spending on infrastructure, if not properly phased, could boost domestic demand, placing additional pressure on prices,” said the policy report. Against this background, inflation could end up outside the target range of 4-5 percent, said Williams.