Saturday, November 21 2009

INFLATION has fallen to 3.5 percent due to the decline in economic activity and the delayed impact of lower international commodity prices. This information was contained in the Central Bank’s repo rate report which was released yesterday.

Food inflation, the main driver of the headline inflation rate, slowed to 3.5 percent in the 12 months from October from 6.8 percent in the previous month. The bank said this was the first occasion that food inflation dipped below four percent since 1999. On a year-on-year basis to October 2009, slower price increases were recorded for meat, oils and fats, fruits, sugar and confectionery items in comparison to September 2009. Over the same period, the rate of increase in the prices of fish and vegetables was somewhat higher.

At the same time, the 12-month decline in the prices of bread and cereals as well as in milk, cheese and eggs evident in September was more pronounced in October 2009. Core inflation, which excludes food prices, fell from 3.9 percent to 2.2 percent in the previous month and 7.4 percent a year earlier. There were also declines in the sub-indices for recreation and culture, clothing and footwear on a year-on-year basis.

On a year-on-year basis, the cost of health services rose by 6.8 percent in October reflecting increased medical fees. Increases in the prices of alcoholic beverages and tobacco reflected, in the main, price adjustments by retailers to tax changes announced in the 2010 Budget. In the more subdued economic environment, private sector credit by the consolidated financial system contracted by 0.4 percent, the first time in seven years, compared with growth of 11.8 percent in the same period one year ago.

Against the background of a continuing contraction in domestic economic activity, declining credit demand and low inflation, the bank has decided to lower the repo rate by 50 basis points to 5.75 percent. The bank said it will continue to keep a close watch on domestic, regional and international economic developments. The next repo rate announcement is scheduled for December 23.