Bank lending rates expected to decline

THE indicator lending rates (ILR) set by commercial banks is bound to decrease as the Central Bank will keep the kina facility rate (KFR) at 7% this month.
With Bank of PNG’s KFR at a low 7%, the next immediate action is that the banks and licenced deposit-taking institutions will reduce their lending rates.
According to BPNG’s recent statistics, when KFR is low and inflationary pressures continue to decline, BPNG will ease its monetary policy similar to that of last month when KFR was also at 7% after a reduction by 1% from 8%.
KFR is a rate set by BPNG to control monetary policy.
It indicates the stance on the monetary policy.
For instance, if it is high, then BPNG tightens its monetary policy but if it is low, then the monetary policy is eased. KFR is used as a formula to measure monetary policy.
Meanwhile, inflationary pressures might continue to decrease.
An increased (higher) imported inflation with none or fewer exports to balance the balance sheet would lead  to increased inflation.
The construction phase of the ExxonMobil-led PNG liquefied natural gas (LNG) project and other activities in the country might give rise to higher imported inflation.
The strength of the kina, especially against the Australian dollar also affects inflationary pressures, and so BPNG watches closely movements in the exchange rates since PNG is an open market.
Since the Aussie dollar has large trade weigh at 40%, its movement against the US dollar has immediate effect on the local currency.
When it increases against US dollar, the kina depreciates in value, prompting inflationary pressure.
But when the Aussie dollar depreciates against greenback, the kina appreciates and so there is ease in inflationary pressure.
BPNG could not indicate the KFR for next month, but maintains it will watch closely movements in the exchange rates.