Maldives Monetary Authority: Inflation Report - 3Q 2017

Transcription

1. INFLATION REPORT THIRD QUARTER 2017
2. Maldives Monetary Authority Inflation Report Third 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 Q3-2017, available as at 01st November 2017.
3. Recent Developments Inflation ­­1 in Q3-2017 has decelerated registering of the CPI basket, contributed a negative 0.6 2.9% (Figure 1), which is in contrast to the percentage points to inflation in Q3-2017. As steady rise of inflation that was observed since the magnitude of the positive contribution to Q4-2016. One of the major reasons for the inflation was about the same as that observed slowdown in inflation compared to the previous during the previous quarter, these developments quarter was the reduction in the import duty had the effect of pulling down the overall rate rates on petrol and diesel towards the end of of inflation during the quarter. The effects June 2017. Moreover, the effect was bolstered by of reducing the duty and removing the fuel the removal of the fuel surcharge on electricity surcharge were large enough that an increase in charged by State Electric Company Limited the administered prices of petrol and diesel in (STELCO) and Fenaka Corporation Limited September 2017 did little to offset the downward following the cut in the duty rates. The resulting movement in inflation. lower electricity prices, which accounts for 4.5% Figure 1: Headline Inflation and Contributions, Q3-2013 – Q3-2017 (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 Q3-17 Food excluding fish Fish Tobacco Rent Health services Transportation Education Other Inflation -2 Source: National Bureau of Statistics 1 The rate of inflation is measured as the year-on-year percentage change in the consumer price index (CPI) for the economy. Inflation Report Q3-2017 1
4. The positive contribution to inflation during the review quarter stemmed mainly from the same Prospects for Inflation components as in previous quarters , mostly on From the outset, it is important to note that account of a number of policy changes made forecasts will not be precisely accurate on account during the past 12 months. Most notably, food of the random shocks that hit the economy. (excluding fish) prices contributed 1.4 percentage This is especially true for the Maldives, as the points to inflation during the quarter, which economy is highly exposed to external sector mostly reflects the base effect of the increase in developments due to its small size and high administered prices of staple foods in October degree of openness. Rather, forecasts are meant 2016. Out of this, rice prices alone contributed to serve as indicators about future developments 0.6 percentage points to headline inflation, while and are important inputs in the policymaking sugar prices contributed 0.4 percentage points. process. The upward pressure on prices was further The short term inflation projections (of up to strengthened by the increase in the import duties four quarters ahead) utilise information from past for cigarettes and selected drinks (energy drinks trends and cycles of both inflation and related and soft drinks) during March 2017. The impact variables, with specific adjustments incorporated mostly stemmed through cigarette prices, which to reflect the impact of known policy changes. is evident by the significant 0.8 percentage point In particular, adjustments are made to take into contribution of tobacco prices despite having a account the fact that the base effects of the share of just 1.7% in the CPI basket. Apart from change in domestic and world oil prices, change this, rental prices and fish prices were the other in the government recurrent expenditure and the significant components that pushed up inflation, change in import duties on cigarettes and selected with individual contributions of 0.6 percentage drinks will be present within the forecast horizon. points and 0.5 percentag­­e points respectively. Table 1 summarises the projections in this 2 Table 1: Headline Inflation Projections, Q4-2017 – Q3-2018 (year-on-year percentage change in prices) Projections CPI Inflation 2 2 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 2.9% 3.2% 3.5% 3.1% 2.9% Base effects persist for a period of 12 months when considering the annual percentage change in prices. Inflation Report Q3-2017
5. report , while Figure 2 depicts the fan chart with The confidence intervals widen gradually as probabilities of various outcomes for inflation. the uncertainty around the projections increase The confidence intervals presented in Figure further into the forecast horizon. 2, illustrated by the shaded bands around the In the absence of major shocks and a broadly central projection, represent these probabilistic unchanged policy stance, forecasted inflation judgements. If current economic conditions is expected to marginally increase in Q4-2017 and policies prevail on a 100 instances, the and Q1-2018. This follows directly from the expectation is that inflation in any given quarter continued inflationary pressure generated by would lie within the darkest central band of the the government policy change to hike the fan (the 30% confidence interval) on 30 of those import duty on cigarettes and selected drinks. instances. On 90 out of a 100 instances, inflation Also, the forecast assumes that oil prices on the is expected to lie somewhere within the fans (90% international market will increase marginally confidence interval). Therefore, the judgement is over the next 4 quarters, which also contributes that inflation would fall outside the red area of positively to the growth in domestic prices over the fan chart in only 10 out of a 100 instances. Figure 2: Headline Inflation Projections, Q1-2015 – Q3-2018 (year-on-year percentage change in prices) 8 8 6 6 4 4 2 2 0 0 -2 -2 I II III 2015 IV I II III IV 2016 Inflation 60% CI I II III 2017 IV I II III 2018 90% CI 30% CI Inflation Report Q3-2017 3
6. the forecast horizon . This assumption is in line assumption underlying this development (which with the oil price forecasts of the International also affects subsequent quarters in 2018) is the Monetary Fund and the Energy Information expected increase in the government recurrent Administration of the United States. Based expenditure during the first quarter of 2018. on the pass-through of world oil prices into The rise in government recurrent expenditure domestic prices, the impact of any changes in for the year 2018 will have an inflationary effect the international oil market is assumed to be felt through-out the year since effects on inflation with a lag of one month. are calculated on a year-on-year basis. Moreover, The base effect of the increase in the ceiling of administered prices for staple foods is expected to fully dissipate at the end of Q3-2017. As a result, it is expected that there will be a decline in the contributions by the components affected by in Q2-2018 and Q3-2018 and reach 2.9% by Q3-2018reflecting the full dissipation of the base effect of the change in import duties on cigarettes and selected drinks. this policy change in Q4-2017. However, despite The forecast published in the Inflation Report a decline in the contributions of staple related (Q2-2017) indicated a downward trajectory for items (which accounts for approximately 3% of inflation in the medium term. However, inflation the CPI basket), projected inflation is expected to realised in Q3-2017 was 1.5 percentage points rise in Q4-2017, because of a significant increase lower than the forecasted value which was in the administered prices of petrol and diesel in estimated at 4.4%. The removal of fuel surcharge October 2017 (an increment of MVR0.57 on the charged for electricity during Q3-2017, which administered price of petrol and an increment was not anticipated at the time of compiling the of MVR0.53 on the administered price of report, was the main factor that resulted in the diesel). The impact of the rise in prices of petrol deviation of actual from the forecasted inflation. and diesel is expected to more than offset the In contrast with previous projections, the current declining contribution of staple foods as energy course of inflation is expected to remain stable related components account for more than 7% at approximately 3% over the next four quarters. of the CPI basket. The contrasting trajectory is a result of the Looking further over the forecast horizon, projected inflation is expected to marginally increase from Q4-2017 to Q1-2018. A crucial 4 inflation is expected to marginally decrease Inflation Report Q3-2017 inflationary pressure generated by the existing and anticipated market developments (Table 2). In particular, the increasing world oil prices and its impact on domestic oil prices, coupled
7. with the anticipated increase in the government is slightly higher than that in the previous recurrent expenditure in 2018 is expected to quarter . This is because the effect of the result in positive headline inflation over the anticipated increase in the government recurrent forecast horizon. expenditure cannot be precisely estimated. Other All in all, inflation is expected to remain at approximately 3% over the next four quarters. The uncertainty around the current projections risks to the projections include volatilities in global commodity prices which in turn feed into domestic consumer prices, and unanticipated policy changes that can impact domestic prices. Table 2: MMA’s Key Judgements in the Current Forecast Compared to the Previous Forecast Developments Anticipated in the Previous Forecast Developments Anticipated in the Current Forecast World Oil Prices Assumed a marginal growth in world crude oil prices from about USD47/barrel to USD49/barrel. Revised data and forecasts indicate that crude oil prices will rise slightly faster, reaching levels of about USD55/barrel towards the end of 2018. Domestic Oil Prices Assumed a zero net effect of the change in oil prices due to offsetting policy changes made at the time. The State Trading Organisation hiked the prices of diesel and petrol significantly in October 2017, and further increases are expected in the subsequent quarters reflecting world oil prices. Government Recurrent Expenditure Assumed no new or large changes to government recurrent expenditure apart from the natural growth experienced every year. The proposed government budget accounts for a significant increase in the government recurrent expenditure. Since this would alter the natural growth rate of expenditure experienced in the past, adjustments have been taken to incorporate the significant rise in expenditure. Inflation Report Q3-2017 5
8. 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