Food inflation continues to gallop

KARACHI: The State Bank of Pakistan (SBP) Tuesday kept its interest rate unchanged for the third time in a row, as it weighs above-target food inflation against a weakening economy.

The central bank left benchmark interest rate at 13.25 in a Monetary Policy Committee (MPC) meeting, as predicted by market analysts surveyed by The News.

The central bank also viewed “the current monetary policy stance as appropriate to bring inflation down to the medium-term target range of 5 to 7 percent over the next six to eight quarters”.

Raza Baqir, Governor SBP, said the central bank’s inflation forecast for the current fiscal year of 2020 was unchanged at 11 to 12 percent though “food inflation is on the higher side as the index is pushed up by perishable commodities”.

“The recent shocks of inflation, however, are transitory and will start easing in coming months,” Baqir told a post policy media briefing. However, he also admitted that “the second round impact of inflation” caused by increase in flour prices and hike in utilities charges “is not yet visible”.

Governor Baqir said fiscal consolidation remained on track during the fiscal year to date “and has supported a qualitative improvement in the inflation outlook”.

Defending the elevated interest rate, Baqir said it was lower than the Pakistani historical average of 3pc real interest rate. He added that Pakistan’s real interest rate was also comparable to those of other countries.

A central bank statement said the monetary policy committee noted that recent inflation outturns had been on the higher side.

“National CPI inflation rose to 12.7 and 12.6 percent (on year on year basis) in November and December 2019, largely reflecting sharp increases in selected food items on account of temporary supply disruptions and upward adjustments in administered prices.”

The statement said high food price inflation, if sustained, “could lead to demands for faster wage growth and to possible risks of a wage-price inflation spiral”.

It added that real interest rates on a forward-looking basis were not high compared to other emerging markets and from the perspective of Pakistan’s own experience.

The governor also dispelled some analysts’ view that the central bank was keeping interest rate high to attract foreign inflows into short-term debt securities.

“There is no link of interest rate with the inflows into the debt securities, as much higher rate of interest has been witnessed in the past,” Baqir added.

“In fact more inflows into debt securities will increase demand of government papers and resultantly higher demand will help in reduction of yield.”

The governor said the country will soon be removed from the grey List of the international terror financing watchdog Financial Action Task Force (FATF).

“Situations are indicating that we will get out of the grey list. The government has made all out efforts,” Baqir said.

“Moving out from grey list will not stop us; we will work to further improve our AML/CFT efforts.”

The FATF, in 2019, placed Pakistan on a gray list of countries with inadequate controls over terrorism financing.

The governor said members of FATF would take a decision to take Pakistan out of the grey list in the plenary meeting to be held in February.

The SBP statement said recent foreign portfolio inflows reflect international investors’ improved perceptions of Pakistan’s credit worthiness.

“Such inflows reduce the interest rate on government debt due to the greater demand for government securities, deepen capital markets, and free up domestic banks’ resources for lending to the private sector.”

“… the bulk of improvement in the SBP’s reserve adequacy stemmed from the improvement in the current account—not portfolio inflows—and current inflows comprised only 3.8 percent of total marketable government debt. As such, inflows at current levels represented limited risks,” it added.

The SBP said it will continue to monitor developments carefully and “has more than adequate buffers to manage any outflows in an orderly manner”.

Governor Baqir said the central bank’s GDP growth forecast was intact at 3.5 percent though agriculture sector faced some setbacks in recent months.

“The estimate for the GDP growth may depend on numbers of agriculture sector,” he added.

The SBP statement said primarily on account of “adverse supply side shocks to cotton production as well as the contraction in LSM (large scale manufacturing) to date, SBP’s projection for real GDP growth for FY20 is likely to be revised downward”.

“Nevertheless, available monthly indicators of activity show that the slowdown in most economic sectors appears to have bottomed-out, and a gradual recovery is expected in the coming months.”

The latest production estimates of major crops indicate that all Kharif crops, except cotton, grew in line with expectations.

Cotton production has been revised downward due to adverse supply side shocks.

LSM indicates that economic activity is strengthening in export-oriented and import-competing industries, while inward-oriented industries continue to slow down.

Specifically, LSM showed gains in textiles, leather products, engineering goods, rubber products, cement and fertiliser, and declines in auto, electronics, food, chemicals, and petroleum products.