Significant rise in energy prices could impact improving inflation outlook — Central Bank of Pakistan
KARACHI: Pakistan’s central bank has warned that a significant rise in energy prices could offset the impact of recent positive developments on the inflation outlook and urged the government to set an inflation target range in consultation with the central bank. asked to do so.
The State Bank of Pakistan (SBP) announced that it has revised its inflation forecast range for the current fiscal year to 23-25% against the target of 21% after the inflation rate reached a record high of 38% in May last year. did. During periods of high inflation, measures were taken to suppress demand pressure and prevent inflation expectations from becoming unfixed.
The central bank raised the policy rate by a cumulative 1,500 basis points in FY22 and FY23, keeping it at 22%, as energy price adjustments due to long-term structural issues continue to impact inflation. The inflation rate fell from a peak of 38% to 29.7% in December 2023, as a result of monetary tightening supported by a certain degree of fiscal consolidation, declines in global commodity prices, and improvement in domestic agricultural production. , the core inflation rate also began to gradually slow down. .
“Significant increases in managed energy prices could offset the impact of positive developments on the inflation outlook,” the central bank warned in its semi-annual report released on Tuesday.
Higher input costs, higher indirect taxes and the implementation of the upward revision of the minimum wage announced in the FY24 budget and the secondary effects of administrative prices for food and energy items are responsible for the persistence of primary core inflation. It became. According to the report, it will reach half of the total in 2023-24 (first half to 2024).
“Despite weak domestic demand and declining global commodity prices, a combination of lingering structural issues, a weaker PKR compared to H1 2023, higher government spending and supply shocks has led to a decline in the national CPI. Inflation remained at a high level.” read.
The central bank also said its inflation outlook of 23-25% could be at risk due to rising geopolitical tensions, unfavorable weather conditions, unfavorable developments in global oil prices and subsequent external balance pressures. He warned that he expected inflation to fall to 5%. –7% by September 2025.
To effectively anchor inflation expectations, the central bank said: “It is important that governments set inflation target ranges in consultation with the SBP, similar to the practice of joint agreements between governments and central banks in other countries such as Canada and India,” and the United Kingdom. ”
According to the report, deviations from planned fiscal policy, including administrative pricing, must be controlled in scale and timing to avoid impacting the credibility of monetary policy and stoking long-term inflation expectations. It is said that it is necessary that it is not large.
In order to promote competition in the medium to long term and thereby reduce inflationary pressures, it is essential to relax price administration policies and eliminate price ceilings. Productivity increases are needed to improve supply and lower costs per unit, but in the long term the pace of population growth will also need to slow significantly to alleviate fundamental demand pressures.
“There are gaps in our collective and up-to-date understanding of domestic inflation trends,” the bank said. “Closing these gaps in understanding will require a concerted effort by academia, government agencies, policy research organizations, and others.”
Pakistan’s macroeconomic situation has improved somewhat since the first half of 2024, with real economic activity recovering moderately from last year’s contraction, but the $3 billion Standby Agreement (SBA) with the International Monetary Fund (IMF) remains in external accounts. It helped reduce stress, the paper said. Central Bank. Domestic demand will be suppressed due to continued monetary tightening and fiscal consolidation, and a gradual economic recovery is expected in the second half of FY2011.
On the back of improved business confidence, high-frequency demand indicators from November 2023 onwards, and strong outlook for wheat production in FY24, the SBP forecast real GDP growth in the range of 2-3% for the current fiscal year.
