SBP sees inflation touching 6 to 7 percent in FY2019

KARACHI: The central bank views consumer price inflation to reach six to seven percent in the current fiscal year of 2018/19 as opposed to its earlier estimate of 5.5 to 6.5 percent, which may give it a room for another hike in the upcoming monetary policy announcement.

The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC), in its latest meeting, revised the range estimate for average consumer price index (CPI) inflation upward to six to seven percent for FY2019 in view of the inflationary trends seen by the close of FY18, “from the previous range of 5.5 to 6.5 percent presented in the MPC meeting held in May”.

“The forecast range indicates the anticipation for FY19 inflation (is) to surpass the six percent target mainly due to impact of rupee depreciation and the likely continuation of the twin deficits,” minutes of the SBP’s monetary policy committee meeting on July 14 said.

“External factors, such as higher international prices of commodities (are) also likely to supplement the increasing trend in inflation.” In July, the central bank raised interest rate by a sharp 100 basis points to 7.5 percent, the biggest push in 10 years and in this year’s third hike, and flagged concerns about economic uncertainties.

The committee considered five reasons to raise interest rate: “trends in future headline and core inflation paths show that the estimated real interest rates are falling; an overall assessment of aggregate demand relative to aggregate supply reveals that output gap has further opened up on the positive side; PKR’s nominal rates have been stickier than in other countries with similar macroeconomic trends; the more interest-elastic portion of external borrowing is increasing; and in the light of sustainability of the external account position, the need to maintain macro stability is an utmost priority”.

Annual consumer inflation clocked in at 5.8 percent in August, barely changed from the July’s reading, but it was still high compared to 3.4 percent recorded in August last year. The inflation projection remains susceptible to shocks to international oil prices and their pass-through to domestic petroleum prices, volatility in food prices, estimates of the output gap, growth in money supply, future exchange rate movements, and potential changes in tariffs.

The SBP’s research staff also informed the MPC that the central bank would need to increase the policy rate in the first two quarters of FY2019.

The document also revealed that the banks were still unwilling to participate in auction of government securities of longer tenors, which indicates expectations of further hikes in interest rates. This expectation is mainly driven by inflationary trends and pressures on the foreign exchange reserves.

Analysts said exchange rate adjustments and monetary tightening would continue in the current fiscal year. “In our base case, we see rupee/dollar exchange rate to crawl up to 134 and discount rate to reach nine percent by FY2019-end,” brokerage Alfalah Securities said in a report. “We see a 50 bps increase in upcoming monetary policy meeting.”