Press Releases

H.E. the Governor of the Central Bank of Kuwait (CBK) emphasized the need for concerted efforts by many parties and for consistent economic policies to contain increasing inflationary pressures in the national economy at the current stage. He explained in a special press statement to the Kuwait News Agency (KUNA) that the continued increase in the general level of domestic prices, i.e. price inflation, represents a national challenge. It results from various internal and external factors. He illustrated that increased inflationary pressures meant by definition reduced purchasing power, which makes fighting these pressures a primary objective of the monetary policy of the CBK in both the medium and long runs, stressing at the same time the role that other general economic policies may play in this regard.

The Governor pointed out to the continued increase in the inflation rate in the domestic price levels in the State of Kuwait according to the most recent data issued by the Central Statistical Office. The Consumer Price Index (CPI) continued to increase in January 2008, as the inflation rate, measured based on percentage change in CPI of the month compared to corresponding month of the previous year, reached 9.5% during January 2008, compared to 3.9% during January 2007. Despite the increasing trend of the inflation rate, data indicate a deceleration in inflation rate measured on the basis of percentage change in CPI of the month compared to previous month, which reached 1.9% during January 2008 compared to 2.2% during the previous month (December 2007)

The Governor explained that CBK recognized early the need to act using available monetary policy tools to curb growing inflationary pressures that became conspicuous in 2005, when the year on year inflation rate in CPI reached 4.1% during that year, after recording an average of around 1.1% during the period 2000 - 2004. The inflation rate then decelerated from 4.1% during 2005 to 3.1% during 2006, but surged again to 5.5% during 2007, then to 9.5% during January 2008, compared to its level during the corresponding month of the previous year (January 2007). The Governor mentioned that CBK also recognizes that certain things can not be confronted. The huge increases in the prices of non-oil primary commodities are external factors that pushed up the domestic inflation rates. The increase in prices of primary commodities appears to be an international phenomenon that varyingly affects both developed and developing economies.

The details of the available CPI data show that the increase in January 2008 CPI figure, compared to corresponding month of the previous year, is basically concentrated in the general price level of three commodity groups: First, the housing services (16.1%); Second, the household commodities and services (10.3%); and third, foodstuff (7.6%).

H.E. the Governor mentioned that the above developments in the general price level in the State of Kuwait indicate that the increase in the inflation rate in the country is attributed to two sets of considerations: the first set relates to external developments, while the other set relates to internal developments. Both the external and internal developments combined have contributed to the CPI changes in the State of Kuwait.

The most significant foreign developments that contributed in increasing levels of domestic inflation is the rise in international food prices. This rise is attributed to several factors such the rise of oil prices resulting in higher freight and transportation costs, the use of agricultural crops in the production of energy known as Bio-fuels, and the drought spells experienced by some major agricultural countries.

Since the CBK monetary policy in fighting inflation focuses mainly on controlling the imported inflationary pressures resulting from exchange rate developments, CBK has changed its KD exchange rate policy on 20th of May 2008, after exhausting the allowed margin for KD exchange rate against the US dollar. CBK re-pegged the KD exchange rate to a weighted basket of currencies of countries that have significant trade and financial relations of the State of Kuwait in order to have more flexibility in changing the KD exchange rate, which in turn contributes in alleviating the effects of sharp fluctuations in major world currencies on domestic inflation.

Local factors also have a significant role in driving price levels upward. Since housing service emerged as one of the basic items in driving levels of local inflation upward, factors, such as rapid population growth in the State of Kuwait, are considered major causes in driving up domestic inflation. As population growth reached 6.8% during 2007 (3.1% for Kuwaitis, and 8.6% for expatriates) against an average population growth of 5.6% during the period 2000 - 2004 (3.2% for Kuwaitis, and 7% for expatriates). This population growth is one of the basic factors that drives inflation levels upward, as it results in a corresponding increase in demand on housing services in excess of available supply. Also, the notable increase in land prices and the insufficiency of areas are considered additional restrictions on supply.

The Governor mentioned that the inflation in the contemporary economies is considered a multi dimensional phenomenon having various factors, and it is necessary to strengthen the monetary policy effectiveness and to increase its efficiency in fighting the inflation through other general economic policies. The success of the CBK in its efforts to fight the inflationary pressures is subject to the amount of support from the country's economic policies to the CBK monetary policy. Monetary policy instruments alone can not restrain price inflation, especially in the current economic conditions. These conditions represent a major challenge of striking a balance between increasing demand for higher public expenditure as the oil surplus grows due to rising world oil prices on the one hand, and fighting inflationary pressures that require lower rates of public expenditure growth, especially the current expenditure on the other hand.

H.E. the Governor concluded his statement by emphasizing that persistent inflation at relatively high rates surely reveals the need for activating the role that other public economic policies, chiefly the fiscal policy, can play by restraining the growth of domestic demand sustained by increased rates of current outlays, so as to reinforce the monetary policy and make it more effective in securing monetary stability in the national economy. In this respect, the Governor also highlighted the need for adopting measures aimed at supporting competition in local markets, making land available for private housing and other economic sectors in order to reduce the cost of production of goods and provision of services.