decline in the price of betelnut and lower imported prices of food and fuel, supported by the appreciation of the kina exchange rate. underlying inflation as indicated by the exclusion - based and trimmed mean measures were 7. 7 percent and 6. 5 percent in the december quarter of 2011, respectively. these outcomes were lower than the forecast made in the september 2011 mps, despite the strong domestic demand associated with the png lng project and high government expenditures. the bank projects annual headline inflation for 2012 to be around 8. 0 percent, while trimmed - mean and the exclusion - based inflation are projected to be around 7. 5 percent. the forecasted headline inflation is lower than the 8. 4 percent average for 2011, due to the strength of the kina, lower imported inflation, and stable international food and fuel prices. the kina is expected to remain strong through 2012, mainly due to high capital inflows and export receipts. while this has the effect of lowering inflation, it can adversely affect the traditional export sector. on the other hand, firms must be fair in the conduct of their businesses by passing the benefit of kina appreciation through lower prices to consumers. inflation in png ’ s major trading partners eased in the second half of 2011 and is expected to pass through to domestic inflation in 2012. food, in particular cereal, and fuel prices dropped in the second half of 2011, though both have increased slightly in the first few months of 2012. however, inflationary pressures still prevail, attributable to domestic demand pressures arising from the ongoing construction of the png lng project and subsequent increase in business activity in 2012, and increased private and public spending in relation to the national elections. the elections will also increase the transactions demand for money. bis central bankers ’ speeches supply - side shocks in early 2012, attributable to bad weather and subsequent damage to agricultural output and transport infrastructure are also expected to contribute to inflation. for the medium term, headline inflation is projected to be around 7. 5 percent in 2013 and 7. 0 percent in 2014. these projections are based on a number of factors including the winding - down of the construction phase of the lng project in late 2013, the continued strengthening of the kina and easing global demand ( see chart 1 ). there are upside risks to these projections, including higher domestic demand and associated inflation expectations by firms due to the png lng project, any substantial increase in food and fuel prices

high agricultural and mineral export receipts, combined with inflows related to the construction phase of the png lng project. the kina appreciated against the australian dollar by 8. 3 percent to a $ 0. 4276 over the same period. the appreciation was attributed to cross currency movements, as the australian dollar weakened against the us dollar. as a result, the trade weighted index ( twi ) appreciated by 12. 6 percent during the same period. the real effective exchange rate ( reer ) also appreciated by 7. 6 percent during the december quarter of 2011 ( see chart 3 ). the increase in international reserves led to the growth in money supply and liquidity. annual growth in broad money supply ( m3 * ) and monetary base in 2011 were 17. 3 percent and 61. 7 percent, respectively. the increase in broad money supply resulted mainly from increases in nfa of the depository corporations, while the substantial growth in monetary base mainly reflected increase in commercial bank deposits at the central bank. lending to the private sector continued to grow moderately as a result of firms utilising own funds while those associated with the png lng project received funding from the project. the bank issued net new central bank bills ( cbbs ) totaling k1, 102. 0 million, to diffuse some of the bis central bankers ’ speeches excess liquidity. however, domestic interest rates continued to fall, given the persistent high level of liquidity, with cbb rates at around 2. 0 percent and treasury bill rates at around 3. 0 percent. total liquidity of the banking system further increased by 37. 2 percent to k8, 888. 4 million in 2011, due to high government expenditure and foreign exchange inflows. net claims on the government declined by k846. 7 million in 2011, mainly due to increased deposits in the trust accounts. in the first quarter of 2012, the bank issued additional net cbbs of k92. 4 million. excess liquidity continued to remain high, therefore the bank increased the crr by an additional 1. 0 percent. in 2012, broad money supply is expected to increase by 14. 8 percent, driven mainly by increase in nfa of the banking system. monetary base and private sector credit are projected to grow by 33. 2 percent and 7. 0 percent, respectively. the bank considers the projected growth in monetary aggregates appropriate to support economic growth, but is also mindful of their inflationary impact, for