Increase in NBR interest prevented by inflation?

Two weeks from today, NBR”s Board of Governors to decide if February inflation, standing at a mere 0.24%, is a sufficiently strong reason to discontinue the process of strengthening the monetary policy and to give up a potential new increase of the interest rate. In this context, some financial analysts expect the central bank to wait until the middle of the year to assess the need to modify the interest rate, while others anticipate new increases.

The inflation rate seen in February 2006 against February 2005 dropped to 8.49%, just half a percentage point less than a year ago. During the 12-month period, the annualised inflation saw significant fluctuations, going up to 10% in April-May 2005 and then going down to a minimum of 8.1% in October. Given that inflation was kept steady, at 8.89% in January, the NBR decided in February to increase the monetary policy interest rate by one point, to 8.5%, anticipating that inflationary pressure would still be present. From this point of view, the monthly 0.24% that the National Statistics Institute predicted for February can be considered to be surprisingly low. The annualised inflation dropped to 8.49% – approximately the same level as the interest rate at which the central bank absorbed liquidity from the monetary market after the increase decision made on February 8. Against December 2005, inflation reached 1.27%, with the NBR anticipating a rate of no more than 6.5% until the end of the year. ZF