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«MONETARY POLICY STATEMENT FOR THE FINANCIAL YEAR 2009/2010 APIA October 2009 CONTENTS Page 1. INTRODUCTION.. 1 2. EXECUTIVE SUMMARY. 3 3. WORLD ...»

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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

–  –  –

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

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 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 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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