Status report on implementation of the monetary policy program 2009. Inflation report
Summary
The main macroeconomic developments in the fourth quarter of 2009 were high inflationary environment and faster recovering global economy and domestic economies. Faster than expected increase of prices of raw materials and some food products in global markets, revived economy and strictly expansionary monetary and fiscal policy implementation during the year have resulted in notable acceleration of the rate of inflation in the fourth quarter, having persisted within the target until November. In December, however, the 12-month inflation indicator increased sharply to 6.5 percent, outstripping the target by nearly 1 pp, which was due to more prominent seasonal growth of agricultural products in December. Note that under the above developments the annual average inflation in 2009 has been just 3.4 percent.
Inflation in the fourth quarter was 3.7 percent largely due to 5.8 percent increase in food products (alcohol and tobacco included) (with 3.1 pp contribution to inflation). This in turn has been determined by seasonal price increase in the following items: ìFruitî, by 35.9 percent (with 0.9 pp contribution to inflation) and ìVegetable and Potatoî, by 44.2 percent (with 2.1 pp contribution to inflation). The price increase in item ìVegetable and Potatoî was totally driven by price increases in 4 products: tomato, cucumber, green pepper and eggplant (with 4.2 pp contribution to inflation). Prices of non-food products and service fees have increased by 3.0 percent and 0.7 percent, respectively, with a total 0.7 pp contribution to the quarterís inflation. The impact of inflationary pressures was reflected in the behavior of core inflation, too. Interestingly though, core inflation in the fourth quarter was merely 1.7 percent, while the 12-month core inflation has increased by 1.5 pp against the previous quarterís indicator and made up 5.25 percent.
Economic slowdown, driven by global economic crisis, reached its peak in the second quarter of 2009 (21.8 percent y-o-y) but trended downward in the next quarters, reflecting gradual improvement of the macroeconomic conditions thanks to stimulatory fiscal and monetary policy measures. As a result, as expected, the fourth quarter saw somewhat lesser economic decline of 5.3 percent y-o-y under which circumstance the decline in the period January-December has been up to 14.4 percent y-o-y. And, save for construction branch where the slowdown decelerated, the rest of branches of the economy reported growth over the quarter.
Industry reported growth of value added nearly by 1.4 percent y-o-y (7.6 percent y-o-y decline in January-December); agriculture reported 2.1 percent growth y-o-y (0.1 percent y-o-y decline in January-December); and services reported 0.7 percent growth y-o-y (0.7 percent y-o-y growth in January-December, as well). Due to rigidities existing in the labor market, in the fourth quarter nominal wages in the economy have slightly grown driven by the rise of wages in both budget-supported organizations and firms in the private sector. The growth rate of wages has decelerated in comparison with that of recorded over the first three quarters of the year. The unemployment rate has also responded to the economic slowdown with a certain time-lag. As a result, the labor productivity kept on declining in the fourth quarter though at a slower rate. These developments have resulted to increase of unit labor costs, thus creating an estimated 0.9 percent inflationary pressures in the consumer market, according to the Central Bank.
In the fourth quarter the rate of the decline of domestic demand slackened, mainly due to considerable increase in public expenditures. The latter was determined by expansionary anti-crisis policy launched by the Government. Private spending, also has contributed to alleviation of decline of domestic demand. In the fourth quarter the decline of domestic demand was around 6 percent, recovering by 11.4 pp compared to the same indicator of the previous quarter. Public expenditures increased by about 8 percent, reflecting the Governmentís expansionary anti-crisis policy. The decline in public spending has decelerated, too. In the composition of private spending, private investments declined nearly by 23 percent and private consumption by 0.4 percent (improving 23.8 pp and 1.5 pp respectively compared with the third quarterís same indicators). Despite trends of stabilization, private spending kept on staying below the natural level. As estimated by the Central Bank, real private sector spending has been 3-4 percent below the natural level, thus creating 1-1.2 percent inflationary pressures in consumer market. It should be noted however that, in private spending, consumption of durable goods has reduced considerably, which places no essential impact on the change of CPI. In the fourth quarter the fiscal sectorís impact on the aggregate demand has been 7.8 pp expansionary, according to the calculated fiscal impulse indicator. This was conditioned by increased public expenditures and increased lending to the economy as part of anti-crisis measures launched by the Government, with the impulse generated due to less expansionary impulse of revenues but more expansionary impulse of expenditures. The generation of expansionary impulse of revenues has been attributable to faster declining state revenues versus GDP. In the fourth quarter tax revenues of the state budget have decreased by 11 percent in relation to the same period of the previous year. Relative to the same quarter of the previous year, expenditures, including net lending, have grown by 35 percent. According to the calculated impulse indicator, expenditures had 5.5 percent expansionary impact on the aggregate demand.
According to the Central Bank estimates, in the fourth quarter the combined impact of domestic demand and labor market on prices has been 1.6-1.8 percent inflationary. With the global economy showing trends of recovery and developments in domestic economy, current account deficit was reduced in the fourth quarter in relation to the same quarter of the previous year by USD 102.5 million to amount to USD 410.2 million, with its share making up 15.1 percent of GDP. Based on yearly results, with high declining rate of GDP persisting, the share of current account deficit in GDP has grown and made up 14.0 percent against the previous yearís 11.6 percent. In the fourth quarter of 2009, macroeconomic stabilization trends solidified attributable to the slowing of the decline in the global economy as well as owing to the Central Bank efforts to keep inflation within the target and expansionary monetary and fiscal policy implementation in cooperation with the Government since the second half of the year. These trends were more evident in the performance of monetary indicators as they have grown steadily in the fourth quarter, too. The dollarization of the economy has grown either, reflecting change in foreign currency resources attracted and allocated. Trends of active lending to the economy persisted, fuelling faster growth of dram loans over foreign currency loans. However, growth rates of dram loans still remain inadequate.
Expansionary monetary policy brought about high dram excess liquidity in the banking sector, which in turn has contributed to interest rate cuts in secondary markets of repo operations and government securities. The aforementioned developments have steered the fulfillment of the inflation target and the monetary policy directions during the quarter. On the whole, in the fourth quarter the Central Bank continued implementing monetary policy based on prudent combination of tasks to stimulate economic activity and ensure price stability. Despite the expectations of higher inflation in the forecast horizon, given still high declining rates of GDP, CBA refrained from interest rate lifts based on necessity to contribute to the acceleration of economic recovery. This policy helped to somewhat improve macroeconomic situation, reflecting some positive shifts in real sector.