FY12 offered a pleasant, albeit surprising breather as far as CPI inflation was concerned. The average for the year at 11 percent was at the lower end of SBPs targeted 11-12 percent for FY12, and much less than the whopping 13.7 percent recorded for the year before that.
Though the net CPI figure was helped by stabilising food prices-thanks to declining global commodity prices and better domestic crop production-the relatively resilient core inflation is a cause for concern as it reflects persistence of inflationary expectations in the economy.
The SBPs annual report explains that as households expect inflationary pressures to persist in future, they negotiate higher wages from firms, resulting in increased cost of production which is then passed on to consumers, hence leading to self-fulfilling inflation expectations. Surveys indicate that most households expect significant inflation in the months to come.
Besides inflation due to rupee depreciation, and due to food price volatility, the SBP weighs core inflation and inflation expectations quite heavily, and, therefore, these will play a key role in the Banks policy decisions in future.
While ebbing CPI numbers helped the SBP adopt an accommodative monetary policy stance during FY12, external sector risks-particularly drying up financial inflows-and rising government borrowing contained the discount rate decrease. The latter, in particular, has been quite detrimental to the private sectors credit off-take, with the SBP saying, "SBPs decision to cut its policy rate by 250 bps to 9.5 percent in the initial months of FY13 is partially aimed at reviving private investment in the economy."
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