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Key implications of PNG’s recent CPI figures

Tuesday, July 19, 2022

The price of goods and services have continued to increase since the second quarter of 2021, with Consumer Price Index (CPI) rating closing the first quarter of this year at 6.9 percent – the highest level rating since 2010.

To counter this high domestic inflation, the Bank of PNG has tightened the Monetary Policy by increasing the Kina Facility Rate (KFR) by 0.25 percent to 3.25 percent this month (July 2022).

According to the BSP Pacific Economic and Market Insight Q2 2022 Report, BSP Group General Manager for Corporate Banking, Peter Beswick said the uplift in the Kina Facility Rate (KFR) by BPNG in signalling and tightening the Monetary Policy would result in the finance sector reviewing loan and deposit interest rates.

The KFR intends to serve as the interest rate at which funds can be lent or borrowed.  It is a monthly rate and any changes to it should translate to market interest rates.

“The Bank of PNG has flagged the tightening Monetary Policy, with an increase in the KFR by 0.25 percent to 3.25 percent in July 2022. This move is to counter high domestic inflation. Domestic prices have continued to increase since the Q2-21, with headline CPI for the Q1-22 at 6.9 percent. The highest level since 2010,” Mr. Beswick said.

“BPNG has noted the key drivers of inflation as being import inflation (through fuel and food), caused by the pandemic and Russia-Ukraine conflict. Inflation and living costs are expected to remain high for the remainder of 2022, as global recession fears affecting fuel, energy and logistic costs globally,” he added.

Mr. Beswick further said that under this scenario, PNG should benefit from increased prices on commodity exports. However, this lift could be partiality offset by reduced export volumes in the agricultural sector, as small holders and regional communities are involved in the general election.

“In terms of business drivers, we have seen some uplift in select business sectors of the PNG economy. Hotels & Accommodation providers have seen increases in occupancy levels, due to additional consultants and short term contractors arriving to assist government with the general election. Australia has an increased presence, with additional defence force personal assisting with law and order nationally. While aid agencies have committed additional resources on the ground to assist with the election operations, logistic and oversight.

“Major extractive projects on the horizon for 2023, should see improved sentiment as the PNG economy transitions into its next significant growth phase,” Mr Beswick concluded.