Policy rate unchanged, in line with forecasts

The Central Bank (CBI) Monetary Policy Committee (MPC) has decided to keep the policy interest rate unchanged, in line with our forecast and others. The bank’s key rate will therefore remain 5.75%. 

The forward guidance in the MPC’s statement is unchanged from that provided in the December statement. As it did in December, the MPC says that, “according to the Bank’s forecast, a tighter monetary stance will probably be needed in the coming term, in view of growing domestic inflationary pressures. How much and how quickly the monetary stance must be tightened will depend on future developments.” At this morning’s CBI press conference on the rationale behind the interest rate decision, the Deputy Governor said, in response to questioning, that the tone of the MPC statement reflected strong forces pulling in both directions. Inflation is rising later than was projected in the bank’s last forecast, however, giving the MPC more time to respond to it. 

In this context, the Committee is making reference to the CBI’s new inflation forecast, according to which inflation will be much lower in the near term than had been projected in November. The CBI now expects inflation to rise to 3.1% by the end of 2016, as opposed to the previously projected 4.0%. 

It is interesting that the tone of the MPC statement is unchanged in spite of considerably lower inflation, on average, in the CBI’s new forecast. The change in the forecast for 2016 is due largely to a more favourable initial position and the recent plunge in oil prices. It also emerged at today’s press conference that the first effects of last year’s hefty pay hikes appear less pronounced than previously anticipated. Nonetheless, the CBI expects inflation to measure about 4.0% in 2017. 

Underlying domestic inflationary pressures will be stronger in the near term than the CBI had previously assumed, however. The bank now expects unit labour costs to rise more sharply this year, the fiscal stance to ease more, and the output gap to be wider than in its November forecast. The medium-term inflation forecast reflects strong domestic cost pressures and the widening output gap. 


The CBI projects year-2016 GDP growth at 4.2%, well above the November forecast of 3.2%. The bank’s output growth forecast is now close to our own forecast of 4.4%. The change from the November forecast is due mainly to the expectation of stronger private consumption growth. 

Today’s CBI interest rate decision and the accompanying forward guidance are in line with our forecast, according to which the MPC will hold the policy rate unchanged until Q4/2016. We expect the effective policy rate to rise before then, however, as the CBI’s effective rate shifts from the floor of the interest rate corridor to the centre, in response to reduced financial system liquidity. The timing and overall impact of this change are highly uncertain, though.