Maldives Monetary Authority: Inflation Report - 2Q 2017

Transcription

1. INFLATION REPORT SECOND QUARTER 2017
2. Maldives Monetary Authority Inflation Report Second Quarter 2017 The Inflation Report presents the MMA ’s analysis of recent developments in inflation and prospects for the future. It is published quarterly with the objective of providing a forward-looking guideline on inflation for the general public. The fan chart in this Report reflects the MMA’s current judgment about the most likely path for inflation, and illustrates the uncertainty surrounding this projection. It should be noted that forecasts will not be precisely accurate on account of the random shocks that hit the economy, and are meant to serve as guideposts about future developments. This issue of the report utilises data up to Q2-2017, available as at 03 August 2017.
3. Recent Developments Inflation1 has seen a significant pick-up since Following two consecutive periods of marginal the last quarter of 2016 , registering 4.2% in deflation in Q2-2016 and Q3-2016, the increase Q2-2017 (Figure 1). This is in contrast with the in the ceiling of administered prices for staple period of low inflation, averaging 2.3% between foods pushed inflation up into the low positives. 2013 and 2015, that was experienced following Reflecting this, food (excluding fish) prices, the dissipation of the base effects of the rufiyaa which accounts for 17.5% of the CPI basket, devaluation and the introduction of the goods contributed 1.5 percentage points to the headline and services tax in 2012. The driving forces inflation rate of 1.8% in Q4-2016. Being a base behind this increase are a number of government effect of the policy change, a large effect still policy changes, namely, the increase in the ceiling prevails and will dissipate at the end of Q3-2017. of administered prices for staple foods (rice, Inflationary pressure from the change in flour and sugar) in October 2016 and the hike in administered prices was bolstered in Q1-2017 import duties for cigarettes and selected drinks following increases in the import duties on in March 2017. Figure 1: Headline Inflation and Contributions, Q3-2013 – Q2-2017 (annual percentage change in prices, percentage point contribution) 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Food excluding fish Fish Tobacco Rent Health services Transportation Education Other Inflation -2 Source: National Bureau of Statistics The rate of inflation is measured as the year-on-year percentage change in the consumer price index (CPI) for the economy. 1 Inflation Report Q2-2017 1
4. cigarettes , soft drinks and energy drinks2. The in the CPI basket, also rose during the last two resulting impact on tobacco prices were by far quarters, further pushing up the rate of inflation. the most significant, contributing 0.3 percentage points and 0.8 percentage points to inflation in Q1-2017 and Q2-2017 respectively, despite a share of just 1.7% in the CPI basket. The base effect of these changes will also last for a period An inevitable consequence of the Maldives being a small, open economy which is heavily reliant on imports is that price developments in international markets have a significant influence of one year. on domestic prices. In particular, oil prices have As for price developments of other items, the small share in the CPI basket. This is explained consistent upward movement of rental prices by the large indirect effects stemming through continued on its normal trajectory. Furthermore, other items, as oil prices affect production fish prices, which are the most volatile component and transportation costs in many sectors. The a large impact on domestic prices, despite its Figure 2: Co-movement between Trends in Inflation and Crude Oil Price, 2008-2017 (year-on-year percentage change in prices (right axis), US dollars (left axis)) 10 8 100 6 90 4 80 2 70 0 60 50 40 2008 2009 2010 2011 2012 2013 2014 Trend in inflation (right axis) Trend in crude oil prices (left axis) Source: International Monetary Fund, National Bureau of Statistics 2 2 See the Appendix for details of the policy changes. Inflation Report Q2-2017 2015 2016 2017
5. Primary Commodity Price Indices published by high degree of openness . Rather, forecasts the International Monetary Fund (IMF) show are meant to serve as indicators about future that the price of primary commodities have developments and are important inputs in the been falling in general over the past few years, policymaking process. with crude oil prices (which is a good indicator of movements in the prices of petrol and diesel) being a significant driver of this decline. The impact of this decline on domestic inflation is apparent, and has mostly stemmed indirectly through other imported items. Figure 2 depicts the trend in global oil prices together with the trend in domestic inflation, and illustrates the comovement of the two trends over time. Prospects for Inflation The short term inflation projections (of up to four quarters ahead) utilise information from past trends and cycles of both inflation and related variables, with specific adjustments incorporated to reflect the impact of known policy changes. In particular, adjustments are made to take into account the fact that the base effects of the increase in the ceiling of administered prices for staple foods and the change in import duties on cigarettes and selected drinks will dissipate within the forecast horizon3. Table 1 summarises the projections in this report, while Figure From the outset, it is important to note that 3 depicts the fan chart with probabilities of forecasts will not be precisely accurate on various outcomes for inflation. The confidence account of the random shocks that hit the intervals (CI) presented in Figure 3, illustrated by economy. This is especially true for the Maldives, the shaded bands around the central projection, as the economy is highly exposed to international represent these probabilistic judgements. If market developments due to its small size and current economic conditions and policies prevail Table 1: Headline Inflation Projections, Q3-2017 – Q2-2018 (year-on-year percentage change in prices) Projections CPI Inflation Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 4.2% 4.4% 1.7% 0.3% -0.7% The import duty levied on petrol and diesel was also reduced in June 2017. However, an adjustment was not made to reflect this in the forecast as the reduction in prices that followed was almost completely reversed in subsequent months 3 Inflation Report Q2-2017 3
6. on a 100 instances , the expectation is that inflation initially expected to marginally rise in Q3-2017. in any given quarter would lie within the darkest This follows from the continued inflationary central band of the fan (the 30% CI) on 30 of pressure generated by the recent government those instances. On 90 out of a 100 instances, policy changes, as the full pass-through effect inflation is expected to lie somewhere within to prices is expected to be realised with a lag. the fans (90% CI). Therefore, the judgement is In particular, the pass-through effects of the that inflation would fall outside the red area of change in import duties are expected to prevail the fan chart in only 10 out of a 100 instances. in Q3-2017 as well. The confidence intervals widen gradually as By construction, base effects for inflation the uncertainty around the projections increase calculated on a year-on-year basis will prevail for further into the forecast horizon. a period of one year. Consequently, inflation is In the absence of major shocks and a broadly expected to fall sharply in the subsequent two unchanged policy stance, forecasted inflation is quarters and attain pre-policy change levels Figure 3: Headline Inflation Projections, Q1-2015 – Q2-2018 (year-on-year percentage change in prices) 6 6 4 4 2 2 0 0 -2 -2 -4 I II III 2015 IV I II III Inflation Report Q2-2017 I 2016 Inflation 60% CI 4 IV II III 2017 90% CI 30% CI IV I II 2018 -4
7. towards the end of the forecast horizon . The sharp decline projected for Q4-2017 reflects the dissipation of the base effect of the increase in the ceiling of administered prices for staple foods, while the fall in Q1-2018 reflects the dissipation of the effect of the change in import duties on cigarettes and selected drinks. The impact of oil price movements on the international market on domestic inflation is expected to be minimal during the forecast horizon, as the forecasts published by the IMF indicate a stable path for oil prices, with a marginal growth expected during the next four quarters4. All in all, inflation is expected to revert back to pre-policy levels of marginal deflation within the next four quarters. The risks around these projections largely reflect volatilities in global commodity prices which in turn feed into domestic consumer prices. Domestic fish prices, being the most volatile component in the CPI basket, also contribute significantly to the forecast uncertainty. 4 These projections have been reflected in the inflation forecast presented in this report. Inflation Report Q2-2017 5
8. Appendix Item Policy change Effective date Petrol and diesel Reduced the ad valorem duty from 10 % to 5% of the cif. value of imports 15-Jun-17 Increased the per unit tax from MVR1.25 to MVR2.00 Cigarettes Introduced an ad valorem duty of 25% of the cif. value of imports 6 Energy drinks Changed from an ad valorem duty of 15% of the cif. value of imports to a specific duty of MVR33.64 per litre Soft drinks Changed from an ad valorem duty of 15% of the cif. value of imports to a specific duty of MVR4.60 per litre Staple foods (rice, flour and sugar) Increased the ceiling of the administered prices for these items Inflation Report Q2-2017 1-Mar-17 1-Oct-16
10. MALDIVES MONETARY AUTHORITY Boduthakurufaanu Magu Male ’ - 20182 Republic of Maldives Tel: (960) 330 8679 Fax: (960) 332 3862 Email: mail@mma.gov.mv Website: www.mma.gov.mv