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Ethiopia’s annual inflation has eased for the fourth month in December 2011 to 35.9 percent from 39.2 percent in November 2011. But economists say the trend is likely to be reversed shortly as the National Bank of Ethiopia (NBE) has loosened its monetary policy to boost lending early in January 2012.
Helped by decelerating food prices that consume up to 60 percent of an average family’s income, it is for the first time that the cost of living has improved significantly since the birr was devaluated by 20 percent in September 2010. Annual food inflation slowed to 46.5 percent in December from above 50 percent a month earlier, according to consumer price indices published this week by the Central Statistical Agency of Ethiopia (CSA).
“In December 2011 declines were observed in the prices of wheat, maize, sorghum, pulses and spices,” said the CSA in its monthly report.
According to the CSA, nonfood prices also improved during December to 21.8 percent from 24.2 percent, a month earlier.
The latest improvement in the cost of living could be reversed shortly as the market reacts to latest moves by the NBE aimed at boosting lending, economists said.
Made effective January 2, 2012, NBE has lowered minimum ratio of deposits to be held in the state’s reserve to 10 percent from 15 percent. Also cutting liquidity requirements, tightened back in April 2010, NBE set it at 20 percent, down from 25 percent.
“What this [NBE’s move] will do is make commercial banks lend more which will inject new money into the market. Other than ‘imported’ prices the government said ‘excess money supply’ is to be blamed for still rampant inflation. Now the latest alternation of the monetary policy is likely to further worsen the situation as the cash flow into the market grows,” said one economist on Wednesday.
Other economists say the country’s inflation trend has a rather loose connection with NBE’s intervention.
“I don’t think NBE’s intervention would impact inflation in either direction; the country’s cost of living has uniquely more to do with agricultural production. Though I cannot say in certainty as it needs further analysis, I think the latest ease on prices has to do more with the current season which is the production period,” said Wolday Amha (PhD), former chair of Ethiopian Economists’ Association.
Though commercial banks have welcomed the latest reserve requirements’ revision, they are complaining that NBE’s direction, to buy government issued bonds amounting 27 percent of loans and advances they provide, has created strain.
“The private sector could be hurt or curtailed by the reserve requirements; such monetary policy interventions have clear-cut impact on them but they have hardly similar shocks on prices. In other
countries inflation data even entail political repercussions, here it is not the case; for example you see savings improving despite the fact that you have a negative interest rate scenario. I don’t see institutional capability that appreciates the impact of inflation and monitors and controls it,” added Dr Wolday.