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CENTRAL BANK OF SAMOA
MONETARY POLICY STATEMENT
FOR THE FINANCIAL YEAR 2009/2010
APIA
October 2009CONTENTS
Page
1. INTRODUCTION... 1
2. EXECUTIVE SUMMARY. 3
3. WORLD ECONOMY. 7
4. DOMESTIC ECONOMY IN 2008/2009 12
4.1 Policy Developments
4.2 Macro Economic Performance
4.2.1 Real Sector
4.2.2 Balance of Payments
4.2.3 Prices
5. DOMESTIC ECONOMIC OUTLOOK FOR 2009/2010..... 28
5.1 Government Budget
5.2 Real Sector
5.3 Balance of Payments
5.4 Prices
5.4.1 Headline Inflation
Import Component
Local Component
Headline Inflation Rate
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5.4.2 Underlying inflation
Import Component
Local Component
Underlying Inflation Rate
6. MONETARY POLICY STANCE FOR 2009/2010 39 MPS 2009/2010
1
1. INTRODUCTION
In line with Governments emphasis on transparency and
accountability, Monetary Policy Statements (MPS) serve as the main
vehicle to communicate and promote public awareness of the main
objectives of monetary policy and the targets that would be pursued
by the Central Bank in the year ahead. As well, these Statements are
issued in accordance with the Governments Strategy for The
Development of Samoa. The main objective of the Central Banks
monetary policy is to promote sustainable real economic growth by
maintaining price stability and international reserves viability. In
order to achieve these objectives, monetary policy decisions are
conducted via open market operations through the issuance and
trading of Central Bank Securities.
In pursuing the goal of price stability, the Central Bank relates
Samoas inflation rate to those of its major trading partners. The
annual inflation rates for Samoas main trading partners usually
average around 3.0 percent and this is the target that the Central Bank
normally aims to achieve and maintain each year. However, there are
times that the changes in prices are beyond the realms of monetary
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policy and the control of the Central Bank. The experience of recent
years bared witness to this situation when the persistently sharp rise
of international prices for crude oil and food exerted significant
pressures on the domestic prices of petroleum and food items. In
addition, the rise in inflation in a particular year reflect the revised
prices of public goods and services that are subject to review every
three to five years such as bus, taxi and boat fares, water, electricity
and port tariffs. During such periods, both the headline and the
underlying or core inflation rates rise substantially as seen in the
2008/09 financial year.
Samoa is a small open economy with total merchandise trade alone
representing around 60 percent of nominal GDP. It is crucial
therefore that Samoa maintains a sufficient level of international
reserves to withstand unforeseeable economic shocks. Under present
circumstances, the Central Bank considers a level of gross official MPS 2009/2010
2
international reserves, equivalent to no less than 4.0 months of
imports of goods, as adequate for maintaining the countrys long term
international viability. On the exchange rate, the main objective of the
Central Banks policy is to ensure that export-oriented industries
remain competitive in overseas markets whilst at the same time
minimizing imported inflation. While there is no specific target level
for the nominal effective exchange rate (NEER) of the Tala, the
Central Bank aims to avoid a substantial real appreciation of the Tala
since it can adversely affect the international competitiveness of the
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export sector. MPS 2009/2010
3
2. EXECUTIVE SUMMARY
After growth of around 5.0 percent in previous years, the world
economy only grew by 0.9 percent in the 2008/09 financial year.
Inflation dropped to 1.8 percent and 7.3 percent for the Advanced
economies and Emerging and Developing economies respectively.
Much of the downturn in 2008/09 was due to a sharp decline in the
Advanced economies led by the US, Euro-area and Japan with
negative growth rates of -0.8 percent, -2 percent and -3.4 percent
respectively. Leaders of the Emerging and Developing economies
such as China and India, on the other hand, registered lower but
positive growth rates of 8.3 percent and 6.4 percent respectively
compared to 2007/08.
For 2008/09, monetary policy was highly expansionary with
concerted quantitative easing focused on stimulating growth. By the
end of the period under review, the US Federal funds rate was
aggressively cut to reach 0.0-0.25 percent at end June 2009. The
European Central Bank (ECB) also cut its policy rate to 1.0 percent
while Japan lowered its policy rate to 0.1 percent.
As the financial crisis intensified and evolved into a more disturbing
form by September 2008, the US dollar was swiftly bought on its safe
haven appeal despite a beleaguered US economy and poor interest
rate differentials. Towards the end of the period in review, the US
dollars fortunes stabilized as traders and markets risk appetite
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recovered a little.
In Samoa, the Central Banks (CBS) response to the global recession
was to further ease its monetary policy stance in order to prop up
flagging demand and business confidence. One of the first initiatives
by the CBS was to drive down the cost of borrowing by reducing its
lending rate to the commercial banks from 7.85 percent to 5.0 percent
in February 2009. Furthermore, in March 2009, the commercial banks
were allowed to borrow from the Central Bank secured by up to 50
percent of their Statutory Reserve Deposits at the CBS. The CBS has MPS 2009/2010
4
actively consulted the four commercial banks in reducing lending
rates and injecting much needed liquidity into the economy. In the
process the weighted average interest rates (for both deposit and
lending) fell continuously over the year. However, the reductions
were insufficient to stem the decline in business confidence and loan
demand. Consequently, the annual average growth rates of private
sector credit and money supply slowed down dramatically.
The global downturn impacted adversely on the domestic economy,
with the latest available estimates pointing to a 6.3 percent decline in
real gross domestic product (GDP). Much of the downturn was driven
by reductions in the Other manufacturing, Construction, Food and
beverage manufacturing,Commerce and Agriculture sectors.
Despite concerns in the first half of 2008/09, the external sector
posted a positive outcome with an $11.1 million surplus in the
balance of payments, maintaining a cover of 5.1 months of imports
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for 2008/09.
Inflation remained problematic in the year under review with both the
domestic and external factors pushing both the headline and
underlying rates to highs of 14.2 percent and 17.2 percent
respectively at end June 2009.
For fiscal year 2009/10, Central Bank forecasts, which were based on
information collected prior to the 29 September 2009 Tsunami,
showed that the Samoan economy was destined to recover quickly in
fiscal year 2009/10, bouncing back up by 5.0 percent in real terms.
This pre-tsunami projected turnaround is expected to be driven
mostly by a record overall deficit in the Government Budget for
2009/10 which is equivalent to 11 percent of GDP. The Budget
incorporates Governments economic stimulus response in the form
of heavy investments in construction activities such as the water and
drainage projects, buildings, road infrastructure and road switch
upgrades as well as private projects such as hotels and businesses.
Special focus is also placed on reviving the flagging agriculture sector MPS 2009/2010
5
with a planned USD $10 million assistance from the World Bank.
The prevailing pre-tsunami forecasts show that the balance of
payments is expected to register a modest surplus of $12.5 million in
light of significant Government loans disbursements, increased
project grants and further growth in tourism earnings.
The pre-tsunami forecasts also show inflation declining significantly
in 2009/10 with an expected recovery in agricultural produce supplies
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at the local market pushing down the annual headline inflation rate to
2.3 percent at end June 2010 from 14.2 percent at end June 2009. The
annual underlying inflation rate is also expected to fall to 4.9 percent
from 17.2 percent at end June 2009.
Given the expected recovery in real GDP and the projected strong
external position, the CBS has decided to continue with its easing
monetary policy stance in order to further drive down the high
interest rates and boost the waning private sector credit, ultimately
reviving business confidence and consumer demand. As a result,
higher private sector credit and strong external inflows are expected
in 2009/10. (See Table 1.)
The macro-economic and financial impact of the tsunami is yet to be
determined. However, it is felt that the recovery and reconstruction
efforts will fuel further growth in construction, transportation,
communication and commerce activities in the year ahead.
Consequently, the positive outlook for the real economy as suggested
by the prevailing forecasts remains valid. Nevertheless, these
forecasts will be revised as more up to date information on the macroeconomic impact of the tsunami
comes to hand. MPS 2009/2010
6 MPS 2009/2010
7
3. WORLD ECONOMY
The IMFs July 2009 World Economic Outlook (WEO) update
forecasts a contraction of the world economy by 1.4 percent in 2009,
recovering a bit in 2010, leaving a real growth rate of 0.6 percent in
the 2009/10 financial year. On the other hand, inflation forecasts are
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at 0.1 percent for the Advanced economies and 5.3 percent for
Emerging and Developing economies for 2009. On average,
therefore, inflation for the Advanced economies is expected to
increase to 0.5 percent in the 2009/10 financial year while the rate for
Emerging and Developing economies is expected to decrease to 5.0
percent. Real economic growth rates for China and India are
projected at 7.5 percent and 5.4 percent respectively for 2009 and 8.0
percent and 6.0 percent in terms of the 2009/10 financial year. The
US, Euro-zone and Japan are expected to contract by 2.6 percent 4.8
percent and 6.0 percent respectively in 2009 or improvements of -0.9
percent, -2.6 percent and -0.2 percent respectively in the 2009/10
financial year.
With dismal global growth forecasts for 2009/10, monetary policy is
expected to remain very expansionary throughout the global
economy. Easing inflationary pressures across the globe, (helped
immensely by the huge declines in oil prices, food and commodity
prices) will continue for the period ahead. All over the world the main
focus is now on inciting growth. (See Table 2.) MPS 2009/2010
8
The global economic downturn has taken pressure off energy, food
and commodity prices. Weak global demand will continue to depress
oil prices which are forecast at around the US$68 per barrel mark for
2009/10. Commodity and food prices are still expected to remain
high.
The US dollar is expected to be weighed down by the fragile US
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economic data, low interest rates and most especially improved risk
appetite for other assets.
A look at Samoas two closest trading partners: New Zealand and
Australia.
New Zealand
The New Zealand economy registered quarterly declines in the first
three quarters of 2008/09 but bounced back in the June 2009 quarter
with a positive growth rate of 0.1 percent. In the event, the economy MPS 2009/2010
9
contracted 1.8 percent in the twelve months to June 2009. The
recovery in the June 2009 quarter was driven by activity in primary
industries (fishing, forestry, and mining industry) which grew 1.5
percent whereas activity in goods-producing industries decreased
0.5 percent reflecting contractions in manufacturing and construction
activity. Service industries, however, remained flat in the June 2009
quarter.
For the twelve months to end June 2009, investment in fixed assets
decreased and household consumption expenditure declined, the main
driver of this was durable goods which includes spending on motor
vehicles, furniture and major appliances. Business investment was
also weak and unemployment continued to soar. Decreases in
investment in non-residential buildings, transport equipment, and
plant machinery and equipment were also noted.
With economic activity depressed, the Reserve Bank of New Zealand
(RBNZ) has signaled its willingness to keep monetary policy settings
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at very low levels for some time as inflation is expected to remain
very low and contained within the RBNZs inflation band of 1-3
percent.
While economic activity will continue to be hit hard as spending,
notably for residential investment and consumption, remain weak,
business and consumer confidence are on the mend and a pickup in
migration should add to domestic demand. Due to the ongoing higher
NZD and deteriorating dairy prices, concerns rest squarely with
manufacturing and exporters. Unemployments climb is set to
continue and expected to result in further softness in the labour
market.
The NZ economy is expected to contract in 2009/10 by 1.3 percent
with an inflation forecast of 1.2 percent. On the currency front, the
weaker economy and lower interest rates are expected to weigh on the
NZ dollar but surprises from the risk front are expected to be
frequent. MPS 2009/2010
10
New Zealand Latest figures Forecasts
2009 2009/10 2010
GDP June quarter 09: 1.0%
q/q and -1.8% y/y
-2.0% 1.2% 0.5%
CPI June quarter 09:0.6% q/q
and 1.9% y/y
1.3% 1.1% 1.1%
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Unemployment June quarter 09: 6.0% 6.5% 7.0% 7.5%
OCR End June 09 : 2.5% 2.5% 2.5% 3.0%
Exchange Rate
(vs USD)
End June 09: US$0.64 US$0.63 US$0.67 US$0.71
Australia
The Australian economy grew 0.6 percent on an annual average basis
to end June 2009. The positive contributors were New Machinery
and Equipment and Household Final Consumption. The largest
negative contributors were New Building Construction and imports.
Other poor performing sectors were Agriculture and Forestry and
Fishing. Unemployment for the period in review was recorded at a
multi year high of 5.8 percent.
The Reserve Bank of Australia (RBA) is expected to keep the cash
rate at 3.0 percent as it judges the current stance of monetary policy to
be consistent with fostering sustainable growth and low inflation.
With a strong recovery in business and consumer confidence in a low
interest rate environment and fiscal policy supporting domestic
demand, economic activity is expected to pick up. Recent sentiments
about the economy from the RBA Governor describe the economic
risks as to appear balanced and that Australia might not have been
affected as severely as its peers in the current global slowdown. MPS 2009/2010
11
The Australian economy is expected to contract in 2009/10 by 0.4
percent with an inflation forecast of 1.5 percent.
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Australia Latest figures Forecasts
2009 2009/10 2010
GDP June quarter 09: 0.6%
q/q and 0.6% y/y
-1.4% 0.4% 0.6%
CPI June quarter 09:0.5%
q/q and 1.5% y/y
1.6% 1.5% 1.3%
Unemployment June 09: 5.8% 6.8% 7.3% 7.8%
Cash Rate End June 09: 3.0% 3.0% 3.0% 3.0%
Exchange Rate
(vs USD)
End June 09: US$0.80 US$0.80 US$0.84 US$0.87 MPS 2009/2010
12
4. DOMESTIC ECONOMY IN 2008/09
4.1 Policy Developments
Fiscal policy in 2008/09 continued on an expansionary path, with
Parliament approving an overall Government Budget deficit of $84.8
million. However, the slow implementation of some of the major
projects saw the actual budget deficit in the first nine months to end
March 2009 (the period for which figures are available) amounting to
only $49.7 million, equivalent to 4.7 percent of nominal GDP. The
budget deficit was financed mainly by soft term foreign loans.
In January 2009, the updated Central Bank forecasts pointed to the
economy contracting substantially, as a result of the rapid
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deterioration of the global economy. In contrast to an optimistic
outlook for growth at the beginning of fiscal year 2008/09, the
updated economic indicators for the period to end December 2008
pointed to real GDP contracting in 2008/09. Consequently, at its end
January 2009 meeting, the CBS Board approved the continuation of
the Central Banks accommodative monetary policy stance to
stimulate the economy.
Consequently, the Banks open market operations focused on
flooding the financial system with liquidity, in order to drive market
interest rates down. Fewer CBS securities were therefore issued, with
the aim of increasing the level of excess liquidity in the banking
system. Consequently, the level of CBS securities outstanding
declined 52 percent to $27.5 million in the fiscal year to end June
2009. The bulk of the securities outstanding ($16.0 million) were for
very short term bills (below 91 days maturities) whereas $11.5
million were for the benchmark 91 day securities.
The issuance of fewer securities saw non interest bearing excess
reserves of the banks pushed up to some of their highest levels ever.
Total commercial banks excess reserves expanded steadily from
$32.2 million in June 2008 to $73.3 million in June 2009, a level that MPS 2009/2010
13
was well above the minimum comfortable level of $15 million. (See
Graph 1.)
As a result, total commercial bank liquidity rose from $86.4 million
in June 2008 to $110.7 million in June 2009. (See Graph 2.) MPS 2009/2010
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14
In addition to limiting the volume of CBS securities issued, the
Central Bank also reduced its lending rate to the commercial banks by
2.8 percentage points, from 7.8 percent to 5.0 percent, secured by
Central Bank securities. In March 2009, the commercial banks were
further allowed to borrow from the Central Bank, secured by up to 50
percent of their statutory reserve deposits (SRD) at the Central Bank.
In line with the Central Banks easing monetary policy stance, the
weighted average interest rate on CBS securities fell steadily
throughout the year to reach a low of 2.28 percent at end June 2009,
2.34 percentage points down from 4.62 percent in June 2008. In
response, the commercial banks weighted average deposit rate fell by
0.96 percentage points to 5.19 percent in June 2009 from 6.15 percent
in June 2008. Similarly, the commercial banks weighted average
lending rate fell by 0.53 percentage points to 12.21 percent in June
2009 from 12.74 percent in June 2008. (See Graph 3.) MPS 2009/2010
15
On credit, the combined total of commercial bank loans to the private
sector and public institutions increased by $37.0 million to $685.3
million in the year to end June 2009, which was down from an
increase of $47.8 million in the previous financial year. On an annual
average basis, the growth rate of total credit to the two sectors
combined fell from 10.8 percent in June 2008 to 9.1 percent in June
2009. This largely reflected the deceleration of credit growth to
public institutions whereas the growth rate of credit to the private
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sector alone improved from 6.1 percent in 2007/08 to 7.2 percent in
2008/09. The relatively slow rate of credit expansion in the last two
financial years indicated that the reduction in commercial bank
interest rates so far was insufficient to boost credit demand under the
prevailing recessionary economic conditions. (See Graph 4.) MPS 2009/2010
16
In contrast to the decline in credit growth, in absolute and in relative
terms, there was a substantial net inflow of foreign funds in 2008/09,
associated with an overall surplus in the balance of payments.
Consequently, money supply (M2) expanded 7.6 percent ($46.0
million) in the fiscal year under review to $654.3 million at end June
2009. (See Graph 5.) MPS 2009/2010
17
In 2008/09, the Central Bank allowed the exchange rate of the Tala to
drift upwards to ease some of pressure from rising imported inflation.
Consequently, the .nominal effective exchange rate (NEER) of the
Tala appreciated 1.1 percent on an annual average basis against the
currencies in its exchange rate basket. On the other hand, the high
inflation rate saw the real effective exchange rate (REER) appreciate
10.6 percent. (See Graph 6.) MPS 2009/2010
18
4.2 Macroeconomic performance
4.2.1 Real Sector
National accounts figures for the June 2009 quarter are not yet
available but estimates indicate that the economy contracted 6.3
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percent in real terms in 2008/09, a far cry from the 4.8 percent real
growth in 2007/08. The main culprit was the significant 24 percent
real reduction in Other manufacturing as the global recession
affected the Australian automotive industry which subsequently
reduced the demand for wire harnesses from Samoa. The
Construction industry shrank 33 percent reflecting the winding
down of activities following the South Pacific Games in 2007/08. In
addition, a few of the large Government projects were slow to be
implemented in 2008/09. As evidenced by the very low supply of
local agricultural products to the Fugalei Market, the Agriculture
sector declined 11 percent due to across the board reductions in most
staple and vegetable crops. Food and Beverage manufacturing MPS 2009/2010
19
decreased 24 percent in 2008/09 as a direct result of flagging
production of beer and soft drinks. The combination of high excise
taxes and cheaper imported alternatives (as the case with soft drinks)
has greatly weakened the demand for locally produced soft drinks
and, consequently, their sales and production. Commerce sector also
took a hit, going down 3 percent as a result of reduced consumption
manifesting in slow sales at the large supermarkets and clothing
retailers. The Fishing output fell by 7 percent due to a large drop in
fish catch during the first half of 2008/09.
On the upside, the Transport and communications sector rose 3
percent reflecting continued improvements in the cell phone industry
as well as expansion in taxi fleets. Hotels and restaurants industry
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increased 9 percent in light of new hotels and upgrades and extension
to existing ones such as the extension of the Hotel Millenia and
upgrading of the Tusitala hotel. Public administration increased by 3
percent reflecting the expansionary 2008/09 Budget while Finance
and business service sector rose by 2 percent in line with historical
trends. (See Table 3 and Graph 7.) MPS 2009/2010
20 MPS 2009/2010
21
4.2.2 Balance of Payments
The balance of payments recorded another surplus of $11.1 million
for the third consecutive year, following a huge surplus of $47.3
million in 2007/08. This surplus was mainly the result of continued
improvements in tourism receipts, private remittances and net
disbursement of Government loans during the course of the year. (See
Table 4.) MPS 2009/2010
22
The relative level of international reserves in 2008/09 was the same
as that for 2007/08 at 5.1 months, well above the target cover of 4
months. (See Graph 8.)
Total imports rose 6 percent to $626.1 million in 2008/09 as all of its
three main categories recorded gains especially in the first half of the
fiscal year. However, due to the impact of the global recession in the
last half of 2008/09, imports fell notably. Non petroleum private
sector imports increased 4 percent reflecting mainly a lot of food
imported by wholesale companies such as meat products (poultry and
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mutton mainly), eggs, dairy products and fruits. Furthermore, 2008/09
saw a large shipment of EPCs electricity meters which also
accounted for the increase in this category. Petroleum imports rose 7
percent to $144.7 million as its price fell 21 percent from last
financial years high but its imputed volume picked up 28 percent. In
addition, Government imports increased 34 percent due to a 37
percent increase in its volume reflecting imported building materials
for the new convention centre and pipes for the water and sanitation
project. (See Graph 9.) MPS 2009/2010
23
Exports fell 13 percent in 2008/09 as a result of declines in fresh fish,
beer, coconut cream, nonu juice and fruits and re-exports to name a
few. On the upside, taro, copra meal and virgin oil recorded higher
proceeds over the year. Coupled with the increase on import
payments, the merchandise trade deficit widened 7 percent. (See
Graph 10.) MPS 2009/2010
24
Tourism earnings continued to improve, rising 15 percent in 2008/09
reflecting mostly the influx of holidaying visitors as well as
sportspeople coming for various sporting competitions such as
wrestling and rugby competitions. Visitors from New Zealand,
Australia and Europe increased by 5 percent, 6 percent and 30 percent
respectively, accounting for the bulk of the overall improvement in
arrivals. Arrivals from the US and American Samoa rose by 10
percent and 0.2 percent in that order. With the prices of good and
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services consumed by tourists increasing over the year in light of high
inflation in 2008/09, the average tourist expenditure rose by 11
percent in 2008/09. (See Graph 11.) MPS 2009/2010
25
Private remittances in 2008/09 recorded a 6 percent increase to
$365.5 million despite an expected contraction in the face of
downturn in the main source countries of USA, New Zealand and
Australia. Household remittances went up by 11 percent as Samoans
overseas continued to remit funds and cars for the upkeep of their
families in Samoa while funds for charitable organizations fell 18
percent. Australia and the US accounted for most of this overall
increase with smaller gains for American Samoa and New Zealand.
Remittances from Fiji which largely constitute LDS funds from the
US, fell substantially in 2008/09.
Actual official capital transfers figures are not available but an
increase of 41 percent to $97.6 million was projected in the 2008/09
Budget, down from $69.2 million in the previous year. Government
loans liabilities went up substantially reflecting new loan
disbursements in the course of the year. In the event, a $40.8 million
surplus was recorded in the financial account. MPS 2009/2010
26
4.2.3 Prices
As with the case in 2007/08, movements in consumer prices were
influenced by both local and external pressures, with the latter having
a more prominent impact. Many of the imported food items such as
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chicken, sugar, flour and rice as well as fuel (diesel, unleaded petrol
and kerosene) registered price hikes in 2008/09, pushing up imported
inflation quickly to 15.5 percent at end June 2009 from 8.0 percent at
end June 2008.
Likewise, the local component of the headline Consumer Price Index
(CPI) recorded an increase of 13.7 percent in 2008/09, much higher
than 4.8 percent last year. One of the driving forces was the low
agricultural production at the local market pushing up the prices for
vegetable and stable food crops sold at the Market. Also, the higher
fuel costs spilled over to affect the prices of consumable goods and
services such as bread, electricity rates, transport fares (taxi bus and
boat) as well as fish (whole, stringed and pieces). (See Graph 12.) MPS 2009/2010
27
As a result of the higher imported and local components of the
headline CPI, the headline annual inflation accelerated to 14.5 percent
at end June 2009 from 6.2 percent at end June 2008.
Similarly, the underlying inflation rate surged upwards to 17.2
percent in 2008/09 from 6.9 percent in the previous fiscal year. (See
Table 5.) MPS 2009/2010
28
5. DOMESTIC ECONOMIC OUTLOOK FOR
2009/2010
The following forecasts and macro-economic outlook was based on
information available prior to the 29 September 2009 tsunami. The
forecasts will be revised and updated as the economic and financial
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impact of tsunami becomes known. Meanwhile, it is expected that the
recovery and reconstruction works associated with the tsunami will
fuel construction, transport, communication, commerce and other
economic activities. This, therefore means that the current positive
direction of the prevailing forecasts remain valid.
5.1 Government Budget
With the global recession as a backdrop, Parliament approved another
heavily expansionary Government Budget for 2009/10. The Budget
for 2009/10 is projected to result in an overall deficit of $160.8
million compared to budget deficit of $84.8 million in 2008/09. This
budget deficit is about 11 percent of nominal GDP, well above the 6
percent approved for 2008/09. This record budget deficit, to be
financed largely by external soft term loans, reflects public and social
infrastructural developments, including large education and health
projects as well as the road switch preparations.
Total revenue is expected to contract in face of shrinking import
duties and VAGST collections due to weak consumer demand.
External grants, however, are expected to increase significantly to
$152.8 million, driving total revenue and grants to $511.0 million.
Total expenditure, on the other hand, is projected to jump to $671.8
million in 2009/10 from $595.5 million in 2008/09. (See Table 6 and
Graph 13.) MPS 2009/2010
29 MPS 2009/2010
30
5.2 Real Sector
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The economy in 2009/10 is expected to rebound from last year in
light of the aggressiveness of the fiscal policy. Projects aimed at
improving and strengthening the education, health, agriculture, water
and electricity sectors in addition to continual infrastructural works
have been expedited in the budget in order to stimulate economic
growth in 2009/10. These are expected to combine with private sector
projects and further growth in tourism to boost growth in the real
sector.
In the event, real GDP is expected to increase by about 5.0 percent in
2009/10, driven by all sectors except Other manufacturing (still in
the recovery phase) and Food & Beverage manufacturing (low
demand from American Samoa). The Construction sector (third
largest) is expected to grow by 30 percent in line with government
funded and private projects while transport and communications
sector is anticipated to improve by 10 percent as the transport
industry is tied closely to construction activities. The Commerce
sector is expected to recover by 1 percent as demand picks up while MPS 2009/2010
31
the Agriculture and Fishing sectors are expected to increase by 2
percent each. Finance & business service and public
administration sectors are forecast to growth by 3 percent and 2
percent in that order. (See Graph 14.)
5.3 Balance of Payments
The balance of payments is expected to record another surplus in
2009/10. Given the significant inflows projected in the 2009/10
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Budget, such as the $149.6 million net disbursement of Government
loans (of which only $100.0 million is actually expected to be
disbursed in 2009/10) as well as a substantial increase in project
grants to $137.5 million from $97.6 million in 2008/09.
On the current account, exports for 2009/10 are anticipated to remain
more or less the same from last year to $28.1 million. This is due to
modest gains in fish, coconut oil, nonu juice and nonu fruit being
offset by reductions in beer, coconut cream, re-exports and virgin oil.
Fish exports is expected to recover in line with the new addition of a MPS 2009/2010
32
large fishing vessel to the current fleet as well as improvement in
catch per effort while beer exports is anticipated to drop significantly
in 2009/10 reflecting the already low demand from American Samoa
being exacerbated by the closing of the Chicken of the Sea cannery
which will mean around 800 jobs lost including local expats working
in American Samoa.
Given the strong recovery in economic activity in 2009/10, total
imports are expected to pick up strongly, up 12 percent to $699.4
million. Non petroleum private sector imports are envisaged to
improve by 14 percent to $515.5 million reflecting more demand for
food products by wholesale companies, more construction materials
for new construction projects, higher demand for right hand drive cars
and materials for the water and electricity projects. The value of
petroleum imports is expected to increase by 9 percent to $157.9
million reflecting anticipated recovery of world oil prices as the
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recession bottoms out as well as increased demand for petroleum as
the economy recovers. Government imports, on the other hand, are
expected to decline by 7 percent reflecting large one off import
shipments in 2008/09.
On the basis of the Samoa Tourism Authoritys Tourism
Development Plan for the next five years, which was launched in July
2009, tourism is expected to continue to perform strongly in 2009/10
despite tourist arrivals from American Samoa expected to fall in view
of expected closing of the COS Cannery in September 2009. Tourist
arrivals are expected to increase by 4 percent to 131,687 in 2009/10.
The bulk of the visitors are expected to come from New Zealand and
Australia. With a 5 percent increase anticipated for average tourist
spending in 2009/10, total tourism proceeds are expected to increase
by 9 percent to $338.8 million. Private remittances, on the other hand,
is expected to decline by 4 percent to $351.5 million in 2009/10,
driven by an 18 percent drop in charitable organizations remittances
while household remittances are expected to increase by 3 percent
reflecting steady inflows of cash, in kind and car remittances for
family maintenance. (See Graph 15 and Graph 16.) MPS 2009/2010
33 MPS 2009/2010
34
On the whole, the balance of payments is expected to post another
surplus of $12.5 million in 2009/10, slightly higher than the $11.1
million surplus last year. With the strong increase in total imports, the
level of international reserves is anticipated to fall to 4.8 months of
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imports, below 5.1 months cover for 2008/09 but well above the
minimum target of 4.0 months.
5.4 Prices
Consumer prices in 2009/10 are expected to decline sharply from the
previous year as inflationary pressures that drove up prices in the
preceding year start to abate. Imported inflation fell in May 2009 and
will continue to do so for the rest of the 2009/10 fiscal year as the
current weak global demand for international traded commodities will
see prices remain lukewarm with oil prices to rebound but not as
much as the price booms in 2008/09, hovering around the USD$68.75
per barrel in 2009/10. Domestic inflation is also anticipated to shrink
reflecting the anticipated recovery in agricultural supplies at the
Fugalei Market as well as the expectation of no further hikes in utility
services such as water, electricity and transportation.
5.4.1 Headline Inflation
Import Component
The current weak global demand for internationally traded
commodities, in the face of the prevailing recessionary pressures
affecting the global economy, will have a depressurizing effect on
imported inflation in the next twelve months. Likewise, the forecast
low inflationary expectations in Samoas main trading partners
(particularly, New Zealand, Australia and USA) in the immediate
future will help reduce inflationary pressures that were quite
significant in 2008/2009. For crude oil, expectations are that prices
will not be much above the average of $68.75 per barrel in 2008/2009
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with high excess capacity in oil producing countries expected to
buffer any growth in demand. Despite the recent rebound in prices, it MPS 2009/2010
35
is expected that any price increases during 2009/2010 will be smaller
than the price booms recorded in 2008/2009. And, along with the
local pricing mechanism, particularly for imported fuel, prices of
imported commodities are expected to stabilize at current levels. On
average, food prices are estimated to grow by 5.6 percent compared
to a 20.2 percent expansion in 2008/2009. The steady levels for fuel
products over the next twelve months to June 2010 are expected to
reduce the growth in price levels of the housing and household
operations (down 3.6 percent compared to a 7.4 percent growth in
the previous fiscal year) and transport and communications (decline
by 10.6 percent compared to a 7.7 percent growth in 2008/2009)
commodity groups. In the event, imported inflation is forecast to
decelerate from 15.5 percent at end 2008/2009 to 2.6 percent at end
2009/2010.
Local Component
Similar to imported inflation, the domestic headline inflation rate for
the forecast period ahead (2009/2010) is expected to decline to 2.3
percent from 13.0 percent at end June 2009. Largely driving this
reduction over the next twelve months is a lower 3.9 percent
expansion in the Food sub-index compared to the 21.1 percent
growth in the fiscal year 2008/2009, mainly reflecting an anticipated
recovery in local agricultural production as well as the absence of any
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further upward revisions in bread prices, which is one of the main
commodities in this sub-group. The estimated levels in imported fuel
will also affect the cost of producing electricity, with further
adjustments in the fuel surcharge on electricity expected. For the
Housing and Household Operations sub-group, price levels are
expected to decline 3.5 percent compared to a 5.9 percent growth in
the previous twelve months to 2009. With transport fares already
revised upwards in 2008/2009, the forecast local Transport and
Communications sub-index for 2009/2010 does not include any
further changes in fares, with the only adjustment for this sector to
come from possible reductions in international calling rates. As a
result, this commodity group is expected to register an expansion of MPS 2009/2010
36
2.3 percent, lower than the 12.9 percent growth in 2008/2009. All in
all, the overall local component of the headline CPI is anticipated to
grow by 2.3 percent in the year to end June 2010 compared to 13.0
percent in the year to end June 2009. (See Graph 17.)
Headline Inflation Rate
With the current weakening of global demand for internationally
traded commodities, lower inflation for Samoas main trading
partners and improved local agricultural production, inflationary
pressures are expected to ease substantially in the next twelve months
ending June 2010. The annual headline inflation rate is expected to
decline from 14.2 percent at end June 2009 to around 2.3 percent at
end June 2010. (See Graph 18.) MPS 2009/2010
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37
5.4.2 Underlying Inflation
Import Component
It is anticipated that the overall import component of the underlying
CPI will decline within the next twelve months, dropping to 4.6
percent from 17.3 percent at end June 2009. This forecast largely
reflects moderate easing of commodity prices in the global markets
compared to the price hikes seen in 2008/2009. And with an
expected 4.8 percent real growth in the Samoan economy, domestic
demand conditions are likely to strengthen, consequently influencing
imported prices in the underlying CPI.
Local Component
On average, the domestic underlying inflation rate is expected to slow
down to 4.2 percent at end June 2010 from 16.8 percent at end June
2009. This downward projection is based on an expected drop in MPS 2009/2010
38
local food prices compared to 2008/2009 (particularly with the
absence of any increases in bread prices).
Underlying Inflation Rate
Taking into account the effects of both external and local pressure on
prices for commodities that are not subject to extreme volatility and
price regulations, the annual underlying inflation rate is expected to
decelerate within the next twelve months to 4.6 percent at end June
2010, from its current peak of 17.2 percent at end June 2009. (See
Table 5B Underlying Consumer Price Index.) MPS 2009/2010
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39
6. MONETARY POLICY STANCE FOR 2009/2010
The Samoan economy is expected to recover from the adverse impact
of the global financial crisis in 2008/09 posting a 5.0 percent recovery
in real terms in 2009/10 from a steep 6.3 percent real decline in
2008/09. This recovery is expected to be driven mostly by the
expansion in the construction and transport and communications
sectors reflecting substantial public sector projects, recovery in the
agriculture and fishing industries as well as growth in tourism
earnings and project grants from abroad. Exports, however, are
anticipated to remain unchanged while imports are expected to
expand significantly in line with the expected recovery in the
economy. In addition, significant net disbursements of external loans
in 2009/10 should see the balance of payments record an overall
surplus leaving the relative level of international reserves unchanged
at 5.1 months of imports.
In addition, inflation is expected to wind down significantly as
international commodity prices remain subdued in light of continuing
weak global demand an expected slight improvement commodity
production levels in overseas and more or less stable international oil
prices. Already, domestic prices have started to trend downwards,
with the annual headline and underlying rates expected to drop to 2.3
percent and 4.6 percent respectively in 2009/10.
On the other hand, there is a concern on the slowdown of private
sector investment demand with recent data reflecting the stagnant
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growth rate in credit to that sector despite recent decline in interest
rates. Therefore, to encourage and stimulate activity in the private
sector, monetary policy will continue with its easing stance in
2009/10. The main objective is to support and strengthen the private
sector in these trying times. The increase in credit to the private sector
will help increase local production so as to help improve supplies,
especially agricultural production which will go a long way to ease
the high local prices of food crops. Market interest rates are therefore
expected to decline even further in 2009/10, which should encourage MPS 2009/2010
40
a recovery in agriculture, manufacturing, fishing, renewable energy
and tourism sectors.
Although this monetary policy stance was taken prior to the 29
September 2009 tsunami, its expansionary focus is also inline with
efforts to rebuild the areas that have been devastated. Nevertheless,
this monetary policy stance will be reviewed when the macroeconomic impact of the tsunami comes to
hand.
------------------
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Current Banknotes
There are currently four different denominations of Bank of England notes in circulation.Security features help you to identify genuine banknotes.Take your time to check your notes, particularly if light conditions are poor or you are handling a large number ofnotes. Look for the security features described in these pages. Look at the note, and feel the note. Do not rely on onesingle feature. If you have doubts, compare the note with one that you know to be genuine.There are some counterfeit notes about. They are completely worthless. Dont get caught out protect yourself andcheck your banknotes when you receive them.
It is a criminal offence to keep or pass on a note that you know to be counterfeit.If you have a note that you believe is a counterfeit you must take it to the police as soon as you can. They will provideyou with a receipt and send the counterfeit to the Bank for analysis. If the note is genuine reimbursement will bemade in full.
one of the Bank of England's two core purposes is monetary stability. Monetary stability means stable prices - lowinflation - and confidence in the currency. Stable prices are defined by the Government's inflation target, which theBank seeks to meet through the decisions taken by the Monetary Policy Committee.
A principal objective of any central bank is to safeguard the value of the currency in terms of what it will purchase.Rising prices inflation reduces the value of money. Monetary policy is directed to achieving this objective and
providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policyusually operates in the UK through influencing the price at which money is lent the interest rate. However, in March2009 the Bank's Monetary Policy Committee announced that in addition to setting Bank Rate, it would start to injectmoney directly into the economy by purchasing assets - often known as quantitative easing. This means that theinstrument of monetary policy shifts towards the quantity of money provided rather than its price.Low inflation is not an end in itself. It is however an important factor in helping to encourage long-term stability in theeconomy. Price stability is a precondition for achieving a wider economic goal of sustainable growth and employment.High inflation can be damaging to the functioning of the economy. Low inflation can help to foster sustainable long-term economic growth.
Overview 5
Overview
Financial and credit markets
Since the August Report, the MPC has maintained Bank Rate at
0.5% and its stock of purchased assets at 200 billion. Market
participants revised down further their expectations of the
near-term path of Bank Rate and raised their expectations of
future asset purchases by the MPC. Long-term government
bond yields in the United Kingdom, United States and
euro area declined further. UK corporate bond yields also fell,
while equity prices rose. The sterling effective exchange rate
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remained around 25% below its mid-2007 level, albeit a little
weaker than three months earlier.
Conditions in UK banks wholesale funding markets improved,
although banks continue to face significant challenges in
refinancing maturing funding. The cost and availability of
finance for large companies improved further, but credit
conditions for small companies and households were still tight.
Annual growth in both bank lending and broad money
remained weak. Housing market activity continued to be
subdued and house prices fell slightly.
Demand
The robust recovery in global demand and world trade
continued, albeit unevenly. Output in many emerging
economies, especially in Asia, grew rapidly. Stronger activity in
The United Kingdom continued to recover from the recent deep recession. Global output and world
trade grew robustly, although fragilities remain. The UK recovery is expected to continue, supported
by expansionary monetary policy, further growth in global demand and the past depreciation of
sterling. GDP growth is judged to be a little more likely to be above its historical average than
below it for much of the forecast period. Even so, the large fall in output during the recession means
that some spare capacity is likely to persist over the forecast period.
CPI inflation remained well above the 2% target, elevated by the restoration of the standard rate of
VAT to 17.5% and the past depreciation of sterling. Inflation is likely to stay above the 2% target
throughout 2011, given the forthcoming rise in VAT and continuing increases in import prices. As
the impact of those factors on inflation diminishes, inflation is likely to fall back, reflecting
continuing downward pressure from the persistent margin of spare capacity. But the timing and
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extent of that decline in inflation are highly uncertain. Under the assumptions that Bank Rate
moves in line with market rates and the stock of purchased assets financed by the issuance of
central bank reserves remains at 200 billion, the chances of inflation being either above or below
the target by the end of the forecast period are judged to be roughly equal. 6 Inflation Report
November 2010
the euro area was concentrated in Germany and its
neighbours. In contrast, some smaller European economies
continued to face significant challenges as they responded to
concerns about their sovereign debt positions. US GDP
expanded at a moderate pace.
UK exports of goods grew robustly over the past year,
supported by the rebound in world activity and the
depreciation of sterling since mid-2007. But services exports
continued to fall, perhaps in part reflecting a shift in global
demand away from services in which the United Kingdom
specialises, such as banking. The level of sterling should
support a gradual narrowing in the trade deficit.
During the financial crisis, households and businesses in
aggregate cut back sharply on spending relative to their
incomes as the economic outlook deteriorated, uncertainty
increased and credit became less available. But private
domestic demand has since recovered to some extent.
Consumer spending picked up over the past year despite weak
income growth, so the household saving ratio fell back. In
contrast, financial saving by the corporate sector remained
elevated despite stronger investment and a return to inventory
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accumulation.
A significant fiscal consolidation is under way. The
Committees projections are conditioned on the plans set out
in the June Budget and the October Spending Review. The
Spending Review provided more detail on the Governments
expenditure plans but contained little additional news for the
macroeconomic outlook.
The outlook for GDP growth
GDP growth was provisionally estimated to be 0.8% in
2010 Q3, similar to its average in the first half of the year.
Growth over recent quarters appeared to have been stronger
than the Committee had expected at the beginning of the year.
But a number of surveys of output growth and confidence
were below levels seen earlier in the year, suggesting that
growth may slow in the near term.
Chart 1 shows the Committees best collective judgement for
four-quarter GDP growth, assuming that Bank Rate follows a
path implied by market interest rates and the stock of
purchased assets financed by the issuance of central bank
reserves remains at 200 billion. The considerable stimulus
from monetary policy, together with a further expansion in
world demand and the past depreciation of sterling, should
support recovery. Those factors are likely to encourage private
sector spending and some rebalancing of the economy
towards net trade. But the strength of the recovery is likely to
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be tempered by the fiscal consolidation and the reduced
availability of credit.
The outlook for growth is highly uncertain. The contribution of
net trade to growth has so far been weaker than the
7
6
5
4
3
2
1
0
1
2
3
4
5
6
7
8
2006 07 08 09 10 11 12 13
Percentage increases in output on a year earlier
+
Bank estimates of past growth Projection
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ONS data
Chart 1 GDP projection based on market interest rate
expectations and 200 billion asset purchases
The fan chart depicts the probability of various outcomes for GDP growth. It has been
conditioned on the assumption that the stock of purchased assets financed by the issuance of
central bank reserves remains at 200 billion throughout the forecast period. To the left of the
first vertical dashed line, the distribution reflects the likelihood of revisions to the data over the
past; to the right, it reflects uncertainty over the evolution of GDP growth in the future. If
economic circumstances identical to todays were to prevail on 100 occasions, the MPCs best
collective judgement is that the mature estimate of GDP growth would lie within the darkest
central band on only 10 of those occasions. The fan chart is constructed so that outturns are
also expected to lie within each pair of the lighter green areas on 10 occasions. In any particular
quarter of the forecast period, GDP is therefore expected to lie somewhere within the fan on 90
out of 100 occasions. And on the remaining 10 out of 100 occasions GDP growth can fall
anywhere outside the green area of the fan chart. Over the forecast period, this has been
depicted by the light grey background. In any quarter of the forecast period, the probability
mass in each pair of identically coloured bands sums to 10%. The distribution of that 10%
between the bands below and above the central projection varies according to the skew at each
quarter, with the distribution given by the ratio of the width of the bands below the central
projection to the bands above it. In Chart 1, the ratios of the probabilities in the lower bands to
those in the upper bands are approximately 6:4 at Years 2 and 3; the downward skew is
somewhat smaller at Year 1. See the box on page 39 of the November 2007 Inflation Report for
a fuller description of the fan chart and what it represents. The second dashed line is drawn at
the two-year point of the projection.Overview 7
Committee had expected, and it is unclear how persistent that
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weakness will prove to be. Private domestic demand could
grow rapidly if confidence recovers, and if businesses reinstate
investment projects previously put on hold. But there are also
significant downside risks to the path of private demand,
especially to household spending. Some households may not
yet have fully adjusted to the forthcoming fiscal consolidation.
In addition, there may be a further drag on consumption from
weak confidence, higher savings for retirement, and some
households high levels of debt.
There is a wider than usual range of views among Committee
members over the likely effects on growth of these various
factors. The Committee continues to judge that relative to the
most likely path shown by the darkest band in Chart 1
the risks to growth are skewed to the downside. Taking into
account that skew, the Committees best collective judgement
is that GDP growth is a little more likely to be above its
historical average than below it for much of the forecast
period. Chart 2 shows that output is likely to remain
significantly below the level implied by a continuation of its
pre-recession trend.
Costs and prices
CPI inflation was 3.1% in September. The elevated level of
inflation continued to reflect the restoration of the standard
rate of VAT to 17.5% and the past depreciation of sterling. The
forthcoming increase in VAT to 20% will put upward pressure
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on inflation throughout 2011. Prices of commodities and other
traded goods and services have continued to increase, raising
companies costs and inflationary pressure.
Labour productivity has recovered to around its pre-crisis level.
On the assumption that underlying productivity continued to
grow during the recession, many companies should be able to
increase output significantly using their existing workforce and
capital. But other signs, such as the modest margin of spare
capacity reported in business surveys and the pickup in
employment, suggested that their scope to do so may be
more limited. Unemployment was stable but continued to
point to a sizable degree of slack in the labour market. Despite
above-target inflation, measures of inflation expectations
appeared broadly consistent with meeting the inflation target
in the medium term and earnings growth remained subdued.
The outlook for inflation
Chart 3 shows the Committees best collective judgement for
the outlook for CPI inflation, based on the same assumptions
as Chart 1. Inflation is likely to pick up a little further in the
near term, and to remain above the 2% target throughout
2011, boosted by a rebuilding of companies margins and the
forthcoming increase in VAT. The projection over the first half
of the forecast period is higher than in August, in part
reflecting further increases in import costs. As the impact of
300
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310
320
330
340
350
360
370
380
390
400
2006 07 08 09 10 11 12 13
billions
Projection
ONS data
Bank estimates of past level
0
Chained-volume measure (reference year 2006). See the footnote to Chart 1 for details of the
assumptions underlying the projection for GDP growth. The width of this fan over the past has
been calibrated to be consistent with the four-quarter growth fan chart, under the assumption
that revisions to quarterly growth are independent of the revisions to previous quarters. Over
the forecast, the mean and modal paths for the level of GDP are consistent with Chart 1. So the
skews for the level fan chart have been constructed from the skews in the four-quarter growth
fan chart at the one, two and three-year horizons. This calibration also takes account of the likely
path dependency of the economy, where, for example, it is judged that shocks to GDP growth in
one quarter will continue to have some effect on GDP growth in successive quarters. This
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assumption of path dependency serves to widen the fan chart.
Chart 2 Projection of the level of GDP based on market
interest rate expectations and 200 billion asset
purchases
Chart 3 CPI inflation projection based on market
interest rate expectations and 200 billion asset
purchases
2
1
0
1
2
3
4
5
6
2006 07 08 09 10 11 12 13
Percentage increase in prices on a year earlier
+
The fan chart depicts the probability of various outcomes for CPI inflation in the future. It has
been conditioned on the assumption that the stock of purchased assets financed by the
issuance of central bank reserves remains at 200 billion throughout the forecast period. If
economic circumstances identical to todays were to prevail on 100 occasions, the MPCs best
collective judgement is that inflation in any particular quarter would lie within the darkest
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central band on only 10 of those occasions. The fan chart is constructed so that outturns of
inflation are also expected to lie within each pair of the lighter red areas on 10 occasions. In
any particular quarter of the forecast period, inflation is therefore expected to lie somewhere
within the fan on 90 out of 100 occasions. And on the remaining 10 out of 100 occasions
inflation can fall anywhere outside the red area of the fan chart. Over the forecast period, this
has been depicted by the light grey background. In any quarter of the forecast period, the
probability mass in each pair of identically coloured bands sums to 10%. The distribution of
that 10% between the bands below and above the central projection varies according to the
skew at each quarter, with the distribution given by the ratio of the width of the bands below
the central projection to the bands above it. In Chart 3, the ratios of the probabilities in the
lower bands to those in the upper bands are approximately 4:6 at Years 2 and 3. The upward
skew at Year 1 is smaller. See the box on pages 4849 of the May 2002 Inflation Report for a
fuller description of the fan chart and what it represents. The dashed line is drawn at the
two-year point.8 Inflation Report November 2010
those effects on inflation wanes, inflation is likely to fall back
reflecting the continuing downward pressure on wages and
prices from the persistent margin of spare capacity.
There are substantial risks to the inflation outlook. Inflation
will be affected by future developments in commodity and
other traded prices, the degree of spare capacity and its impact
on wages and prices, and the evolution of inflation
expectations. Continued strong growth in some emerging
economies may lead to further upward pressure on the prices
of commodities and other imported goods and services, so
pushing up companies costs. The degree of spare capacity and
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its impact on inflation in the medium term will depend on: the
strength of demand; the persistence of the reduction in
productivity; the performance of the labour market; and the
sensitivity of wages to any labour market slack. Inflation may
fall further than expected if the degree of spare capacity is
larger or if it has a greater impact. But inflation may remain
higher than otherwise if the current period of above-target
outturns cause medium-term expectations of inflation to rise.
There is a wider than usual range of views among Committee
members over the likely effects on inflation of these various
factors. Chart 4 shows the Committees best collective
judgement of the probability of inflation being above the 2%
target along with the corresponding probability implied by the
August Report projection. On balance, the Committee judges
that, based on the monetary policy assumptions described
above, the chances of inflation being either above or below the
inflation target by the end of the forecast period are roughly
equal. The most likely outcome is that inflation falls below
target by 2013, but the risks around that most likely path are
judged to be skewed to the upside.
The policy decision
At its November meeting, the Committee judged that the
recovery was likely to continue. The outlook for inflation in the
near term was higher than previously expected, in part
reflecting higher import prices. But inflation was still likely to
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fall back in the medium term, reflecting the continuing
downward pressure from the persistent margin of spare
capacity. In the light of that outlook, the Committee judged
that maintaining Bank Rate at 0.5% and maintaining the stock
of asset purchases financed by the issuance of central bank
reserves at 200 billion was appropriate to meet the 2% CPI
inflation target over the medium term. But the prospects for
inflation remained highly uncertain and the Committee stood
ready to respond in either direction as the balance of risks
evolved.
August Ination Report
November Ination Report
0
20
40
60
80
100
Q4 Q4 Q4 Q4
Per cent
2010 11 12 13
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
The November and August swathes in this chart are derived from the same distributions as
Chart 3 and Chart 5.7 on page 40 respectively. They indicate the assessed probability of
inflation being above target in each quarter of the forecast period. The width of the swathe at
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each point in time corresponds to the width of the band of the fan chart in which the target falls
in that quarter, or, if the target falls outside the coloured area of the fan chart, the width of the
band closest to the target. The bands in the fan chart illustrate the MPCs best collective
judgement that inflation will fall within a given range. The swathes in Chart 4 show the
probability within the entire band of the corresponding fan chart of inflation being close to
target; the swathes should not therefore be interpreted as a confidence interval. The dashed line
is drawn at the two-year point of the November projection. The two-year point of the August
projection was one quarter earlier.
Chart 4 Assessed probability inflation will be above
Target