At the time of the October Monetary Policy Report, the Bank projected that core inflation would rise in the fourth quarter of 2002, reflecting a combination of one-off factors - including the rise in insurance premiums - and the “echo effect” from developments towards the end of 2001. It was expected that the overall impact of these factors would peak in the fourth quarter, with core inflation reaching about 3 per cent at year-end, and that these effects would diminish through 2003. Thus, core inflation and total CPI inflation were expected to return to 2 per cent in the second half of 2003.

Rates of inflation since the October Report have come in somewhat higher than expected. This reflects not only a stronger-than-expected increase in insurance premiums but also some broadening of price pressures.