KARACHI: The State Bank of Pakistan (SBP) Thursday forecast that inflation is likely to remain on the higher side ranging 18-20 percent during this fiscal year (FY23) due to reversal of fuel and electricity subsidies.
According to SBP’s Monetary Policy Statement issued after the meeting of the Monetary Policy Committee (MPC), headline inflation rose significantly from 13.8 percent (YoY) in May to 21.3 percent in June, the highest since 2008.
The increase was broad-based with energy, food and core inflation all rising significantly and more than 80 percent of the items in the CPI basket experiencing inflation of above 6 percent. Strong domestic demand and second-round effects of supply shocks are reflected in the rise of core inflation to 11.5 percent in urban areas and 13.5 percent in rural areas, the SBP mentioned.
At the same time, measures of both short and long-term inflation expectations continue to tick up. Despite the dampening effect of fiscal and monetary tightening on demand-pull inflation, the SBP expects that inflation is likely to remain elevated around current levels for much of FY23 due to the large supply shock associated with the necessary reversal of fuel and electricity subsidies. “Inflation during FY23 is forecast at around 18-20 percent before declining sharply during FY24”, the SBP said.
With inflation running high, majority expects SBP to hike key interest rate by at least 100bps
According to SBP this baseline outlook is subject to significant uncertainty, with risks arising from the path of global commodity prices, the domestic fiscal policy stance, and the exchange rate. MPC said that it will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth and will take appropriate action to safeguard them.
In nominal terms, private sector credit grew by a further 2 percent (MoM) in May, driven by favorable developments in sectors like power, edible oil, construction-allied industries, as well as wholesale and retail trade.
Demand for fixed investment and consumer loans also picked up, reflecting robust economic activity. Since the last MPC meeting, secondary market yields and cut-off rates in the government’s auctions have ticked up in the wake of the high inflation reading in June.
Copyright Business Recorder, 2022
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