The robust global economic growth continues to be favorable to Ethiopia as it is expected to increase global demand for Ethiopia’s exports. However, the possibility of a slowdown in the global economy remains a threat to the country’s export earnings. Rising oil prices continued to put pressures on the current account by escalating the country’s oil import bill.

The quarterly report of the National Bank of Ethiopia (NBE) shows the rise in the prices of oil and other commodities in the international market are also expected to have impacts on domestic prices through the pass-through effect contributing to the current high inflationary pressures in the economy. On the other hand, rising commodity prices such as coffee and oilseeds are expected to boost export earnings, thereby to some extent offsetting the adverse impact of the rise in oil prices on the current account.

The weakening of the US dollar against all major currencies is also expected to boost demand for Ethiopia’s exports in Europe and Asia, which are the two major markets for the country.

In view of higher commodity prices, particularly for energy and food, headline consumer price inflation in OECD countries increased in October to 2.8 percent, from 2.2 percent in the month before. In many emerging markets, inflation increased more strongly because of the higher weight of food in their price index.

The report indicated that in October 2007 CPI inflation stood at 3.5 percent in the United States, 0.8 percentage points higher than its six month average from May to October mainly as a result of higher energy costs and food prices. However, at the same time, core consumer inflation (i.e. excluding energy and food) was 2.2 percentages, equaling the six-month average.

Consumer price inflation in Japan has remained subdued, owing to persistent downward pressures, especially on wages. In October 2007 consumer price inflation returned to positive territory for the first time since December 2006. The annual change in the CPI was 0.3 percent, after -0.2 percent in September, while the annual change in the CPI excluding fresh food was 0.1percent, after -0.1 percent in the previous month.

In the United Kingdom, inflation rose in October to 2.1 percent, from 1.8 percent in the previous month after declining for six consecutive months. This increase is mainly attributable to higher fuel, lubricants and some food prices. In the short run inflation is expected to remain above 2.0 percent on the back of higher energy, food and import prices.

Looking at emerging Asia, inflationary pressures picked up further in China, but remained at moderate levels in the other large economies. Consumer price inflation in China in October rebounded to the August level of 6.5 percent after a slight drop in September, mostly driven by rising food prices. In Korea annual CPI inflation edged up to 3.5 percent in November from 3.0 percent the month before, mainly owing to an upsurge in prices of food and commodities. Wholesale price inflation stood at 3.1 percent in November in India.

Annual consumer price inflation averaged 4 percent in the third quarter in Mexico, broadly unchanged from the two previous quarters. In Brazil, on the other hand, annual consumer price inflation slightly increased to 4.1 percent in October. In Argentina, average inflation in the third quarter stood at 8.6 percent, down from an average of 9.2 percent in the previous six months.

In order to counter shortage of credit as a result of the uncertainties in the financial market, central banks in the advanced economies have been cutting interest rates since August 2007. On the other hand, central banks in emerging economies are pursuing tighter monetary policies because of rising inflationary pressures.

On 31 October the US Federal Open Market Committee decided to cut its target for the federal funds rate by 25 basis points to 4.50 percent. The changes also included a 25 basis point reduction in the primary credit rate to 5.00 percent. The Bank of England’s Monetary Policy Committee also decided to cut its main policy rate by 0.25 basis points to 5.5 percent on 6 December 2007. Meanwhile, the Bank of Japan decided to leave its target for the uncollateralized overnight call rate unchanged at 0.50% at its meeting on 13 November 2007.

In contrast, the People’s Bank of China raised the reserve requirements ratio of banks for the ninth time in 2007 by 50 basis points to 13.5 percent on 26 November. Similarly, Mexico’s central bank raised its key policy rate by 25 basis points to 7.5 percent on 26 October.

Oil prices surged in most of November 2007, with crude oil prices hitting new record highs well above USD 90 per barrel. Towards the end of November and the beginning of December oil prices eased markedly. On 5 December Brent crude oil prices stood at USD 89.7 per barrel, around 48 percent above the levels at the beginning of the year. The surge in oil prices has been mainly driven by a further tightening of market fundamentals and continuing geopolitical tensions.

In particular, a counter-seasonal third-quarter stock draw raised concerns over a global supply tightness ahead of the northern hemisphere winter. According to the November International Energy Agency (IEA) monthly oil report, OECD stocks continued to fall in October and early November, reflecting robust demand and constrained supplies.

However, the price increases have been limited by the possibility of a slowdown in demand growth reflecting high oil prices and a potential US slowdown. The IEA claims that higher energy prices are already having an impact on the demand for oil, particularly in OECD countries. Meanwhile, and despite growing calls for OPEC to increase their output levels, OPEC ministers decided not to increase production levels at their 5 December meeting.

Looking ahead, still limited spare capacity – amid robust demand and continued geopolitical and supply risks – is likely to keep oil prices at elevated levels in the absence of a change in OPEC’s policies. According to futures markets, oil market participants currently expect prices to remain at high levels, declining slightly towards USD 88 per barrel by the end of 2008.

The prices of non-energy commodities remained fairly volatile during October and November 2007 following the strong increase in September. The overall non-energy commodity price index (denominated in US dollars) was on average approximately 14 percent higher in November than a year earlier, as higher agricultural prices more than offset lower metals prices. In particular, food prices continued to rise, although growth rates started declining slightly from the very high values recorded at the end of September. The prices of oilseeds and oils continued to rise in November, as strong demand for biofuels and lower production of soybeans and other oil seeds have left these markets particularly tight.

Coffee prices rose during the third quarter of 2007. In September 2007, the International Coffee Organization’s composite indicator price reached 113.2 US cents per pound, up from 108 US cents in the preceding month and 96 US cents in September 2006.

The US dollar continued to be weak in the third quarter of 2007. Its average exchange rate against the euro reached 1.39 in September 2007, depreciating by 2.1 and 9.3 percent compared to its exchange rate in the preceding month and the same month of last year, respectively. It also showed monthly and annual depreciations of 0.4 and 7.1 percent against the pound sterling.