Excerpts from the MPC Press Release:
Month-on-month overall inflation remained within the target range in May and June 2018 largely due to lower food prices. The inflation rate was 4.3 percent in June compared to 4.0 percent in May 2018, mainly reflecting increases in energy prices. Non-food-non-fuel (NFNF) inflation remained below 5 percent, indicating that demand-driven inflationary pressures are muted. Higher domestic fuel prices due to the recent increase in international oil prices, and the impact of the excise tax indexation on prices of some of the CPI items are expected to exert moderate upward pressure on inflation in the near term. Nevertheless, overall inflation is expected to remain within the target range mainly due to expectations of lower food prices reflecting favorable weather conditions.
Data for the first quarter of 2018 showed a strong pickup of the economy, with real GDP growth of 5.7 percent compared to 4.8 percent in the first quarter of 2017. This outcome was driven by a strong recovery in agricultural activity due to improved weather conditions, a recovery of the manufacturing sector, and resilient performance of the services sector particularly wholesale and retail trade, real estate, and tourism. Growth in 2018 is expected to be strong, supported by continued recovery in agriculture, a resilient services sector, alignment of Government spending to the Big 4 priority sectors, and the stable macroeconomic environment.
The MPC Private Sector Market Perception Survey conducted in July 2018 indicated that inflation expectations were well anchored in the near term on account of lower food prices, but was expected to rise slightly due to higher energy prices and the impact of recent tax measures. The Survey indicated sustained optimism for stronger growth in 2018 and an improved business environment. Respondents attributed this optimism to, among others, a rebound in agriculture, completion of key infrastructure projects, focus by the Government on the Big 4 priority sectors, strong forward hotel bookings, renewed business confidence, and a stable macroeconomic environment.
The MPC noted that inflation expectations were well anchored within the target range, and that economic growth prospects were improving. Furthermore, economic output was below its potential level, and there was some room for further accommodative monetary policy. Consequently, while noting the risk of perverse outcomes, the Committee decided to lower the Central Bank Rate (CBR) to 9.00 percent from 9.50 percent. The MPC will closely monitor the impact of this change in its policy stance. Other developments in the domestic and global economy will also be observed, and the MPC stands ready to take additional measures as necessary.