State Bank of Pakistan has pointed out that growth in investments has declined despite a real GDP growth at 4.1 percent in FY14. SBP warns that decline in investment to GDP ratio has increased the likelihood of a decline in productive capacity in the economy as well. In this backdrop, says SBP, the decline in both measures of core inflation, non-food non-energy (NFNE) and 20 percent trimmed, indicate moderate aggregate demand in the economy, at the moment.
However, as demand picks up, the production constraints existing in the economy might become binding which could lead to inflationary pressures in the medium term. Currently, due to containment of government budgetary borrowings and exchange rate stability amid improved foreign exchange inflows, inflation expectations are benign. SBP, therefore, expects inflation to remain in the single digit in FY15. However, international oil price uncertainty and unanticipated price shocks pose risks to the inflation outlook.
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