The Central Bank has issued a warning, cautioning the government against surpassing the 5% spending rule in the upcoming Budget. It emphasizes that exceeding this limit could potentially exacerbate inflationary pressures.
In its Summer Quarterly Bulletin, the Central Bank has revised its forecasts for both domestic economic growth and inflation, raising them upwards. The Bank characterizes the economy as currently operating “at capacity” and “effectively at full employment,” highlighting the risks of overheating.
While the decline in energy and food commodity prices may subdue inflation, the Central Bank asserts that future inflation will be primarily driven by domestic factors such as increased wages, higher profits leading to price hikes by companies, and heightened consumer demand.
Given the economy’s capacity constraints, injecting additional funds through increased spending or tax cuts on a similar scale as the previous year would contribute to inflationary pressures, warns the Central Bank. Furthermore, it cautions that adhering to the government’s 5% spending rule also risks exacerbating existing imbalances in the economy.
The Central Bank estimates that without the series of interest rate hikes in the past year, inflation would have been 2 to 2.5% higher than its current level. It anticipates that underlying inflation, excluding energy and food prices, will reach its peak by the end of this year, averaging at 4.9% throughout the year. This represents an upward revision from the Bank’s initial Spring forecast of 1.4%.
For this year, headline inflation is expected to average at 5.3%, gradually decreasing to 3.4% next year and 2.5% in 2025.
In terms of economic growth, the Central Bank foresees a 3.7% expansion in the domestic economy measured by Modified Domestic Demand this year, followed by a 2.5% growth next year. It argues that recent fluctuations in quarterly GDP growth primarily reflect the activities of multinational corporations and do not provide a reliable representation of overall economic conditions.
The Central Bank anticipates nominal wages to increase by approximately 6% this year and next. It also expects real wages, accounting for inflation, to recover and surpass 2021 levels by the end of 2024.
.jpg)
