The Bank of Papua New Guinea has released its Monetary Policy Statement for Quarter 1 2024, projecting an increase in inflationary pressures for the year ahead.
This forecast is attributed to several factors, including the removal of fuel subsidy in June 2023, depreciation of the kina exchange rate, increased government spending, and its impact on liquidity and import demand.
According to the statement, the Bank has revised its headline inflation projection upward to approximately 5.0 percent, with both trimmed and exclusion-based measures expected to be around 5.5 percent. While headline inflation is anticipated to remain elevated in 2025, it is forecasted to subside in 2026 following the completion of exchange rate adjustments.
The Bank highlights potential risks to these projections, including disruptions in shipping routes, adverse weather conditions such as El Niño, domestic fuel supply constraints, further easing of monetary policy, and lower foreign inflation from PNG’s major trading partners.
In response to these inflationary pressures, the Bank intends to fine-tune its policies to manage excess liquidity and ensure gradual kina depreciation to mitigate the impact of inflation.
The Monetary Policy Statement also addresses the increase in broad money supply by 11.5 percent in 2023, driven by growth in both net foreign assets (NFA) and net domestic assets (NDA). The Bank forecasts a further increase of 7.9 percent in broad money supply for 2024, primarily driven by domestic borrowing by the Government and the private sector.
To improve monetary policy transmission, the Bank has aligned the 7-day term Central Bank Bill rate with the policy rate, the Kina Facility Rate (KFR), at 2.50 percent. However, challenges persist in transmission due to structural excess liquidity in the banking system.
In light of these challenges, the Bank plans to reintroduce long-term Central Bank Bills to lock in liquidity for a longer period, aiming to improve liquidity management and policy transmission. Commercial banks are urged to adjust their deposit rates and risk premiums on loans accordingly to support the success of these policy measures.
The Bank emphasizes the importance of deposit and lending rates converging to reasonable margins and expects commercial banks to align their pricing with the policy rate. Further policy changes may be required to ensure effective policy transmission in the future.
The Monetary Policy Statement provides insights into the Bank’s strategies for managing inflationary pressures and promoting sustainable economic growth in Papua New Guinea.