Inflation feared from weak kina

THE Central Bank eased its monetary policy this month by reducing the policing interest rate called the kina facility rate (KFR) by 1% to 7% due to continued decline in inflation, Bank of PNG (BPNG) Governor-appointee Loi Bakani said.
“However, the bank is mindful of the upside risks to inflation that could come from a weaker kina and excessive Government spending, especially a fast drawdown of the trust account funds … it will closely monitor these developments,” he said.
Mr Bakani’s comments were reported in the bank’s latest Quarterly Economic Bulletin (QEB).
Mr Bakani said the “great recession” appeared to have come to an end in the third quarter when key economies like US and Germany experienced real growth in gross domestic product (GDP), after four consecutive quarters of decline when GDP increased by 2.8% and 0.3% respectively in the third quarter of this year.
“It is expected that growth in these economies will continue into the fourth quarter of the year.”
However, business uncertainty and low growth in consumer spending had adverse effects on employment growth, with unemployment rate still high in the US at 10% and the European Union at 11%.
Mr Bakani explained recovery in world economy has to continue and become more pronounced before it could impact on external sectors of developing countries.
“For PNG economy, the effects were in the lower demand for its exports induced by the global recession, causing declines in export prices and values and consequently lower trade account surplus in the nine months to September this year as against same period last year.”
Comparing growths in developed economies like the United States, Australia and Germany and emerging economies like China and India, Mr Bakani said: “Growth in the emerging markets underlies the recovery in the developed nations and the world economy.”
Conversely, low foreign inflation and lower international fuel and food prices compared to last year, led to a fall in the inflation rate. 
The annual headline inflation rate had progressively declined over the quarters from the high of 13.5% in third quarter of last year to just 5.3% during the same period this year.
 “This was in part due to lag effect of the appreciation of the kina against the US and Australian dollars in late 2008 and the relative stability of the kina against these currencies in the first half of this year,” Mr Bakani said.
Meanwhile, commercial banks’ indicator lending rates (ILR) spreads were at 10.95% to 11.95 % at the end of June this year to last Nov 18. 
Domestic interest rates had declined and ranged 6.0% to 6.5% in the last quarter this year from 6.5% and 7.0% during the third quarter.
Credit to the private sector continued to grow but at a lower pace.
The level of gross foreign exchange reserves increased from US$2,349 million (K6,155 million) at the end of September to US$2,452 million (K6,556 million) as of last Thursday.