October inflation to go higher on food demand: interest rates to remain stable

10 Nov, 2005

The inflation rate for the month of October would be a little higher than September, but analysts and economists are of the view that it would be because of Ramazan and calamity factors, but as the credit off-take is tapering off, cut-off yields, going forward, might decline.
The inflation number for the month of October would be out in a week''s time, and analysts and economists are of the view that it might range between 8.3 percent and 8.8 percent. The inflation in September was at 8.53 percent, compared with 8.41 percent of August.
The inflation rate would be higher because of increase in demand in October because of Ramazan. The consumption of food items increased during the month while most of the shopkeepers raised food prices, especially vegetables and fruits, because of Ramazan.
Another factor which would raise the inflation figure was the increase in oil prices. The government was forced to raise oil prices in line with international trends and lower the losses incurred following the hike in prices and paying claims to oil marketing companies to keep prices unchanged.
The cut-off yield to government papers might have some little downward trend as the central bank is able to put a lid on inflation rate and hovering within the target. It might go up because of sudden rise in food and transport demand because of exogenous effects, the October 8 earthquake which raised the demand. But the important element for the economists is that the credit-off take which has tapered off, but does not mean that economy is slowing down, rather most of the expansion targeted has now either on the verge of completion or financial close has been achieved.
During July 1 to October 15 period, the credit off-take as per the website of State Bank of Pakistan was at Rs 47.465 billion as compared with Rs 82.853 billion of the same period a year ago.
"We expect inflation to touch higher at 8.83 percent in October from 8.53 percent in September, driven by the Ramazan effect, and high demand emanating after the earthquake. However, this is a pure seasonality play," Muzzamil Aslam, Economist at KASB Equities said.
Inflation rates during Ramazan in FY05 and FY04 were recorded at 9.26 percent from 8.7 percent a month earlier and 5.4 percent from 4.2 percent a month earlier, respectively.
"In October 2005, we expect transport and fuel inflation to be recorded at 24.7 percent (from 20.7 percent in September 2005) and 8.9 percent (from 6.9 percent in September 2005) owing to the 7 percent increase in petroleum prices announced on October 1. Given the change in methodology, we expect core inflation to remain intact at 7.9 percent. However, as per old methodology, we expect core inflation to touch 10.0 percent. We believe that the State Bank of Pakistan''s tightening cycle is over, as credit off-take, CPI inflation and money supply are abating. Going forward, there are expectations that SBP would marginally cut yields on T-bills, as more variables are pointing in this direction," Muzzammil said.
In its recently released annual report, the State Bank of Pakistan (SBP) has indicated that it is not in favour of further tightening of the monetary policy. The SBP Annual Report says: "It has been argued that monetary policy needs to be tightened further in order to reduce the inflationary pressures to more tolerable levels. However, the case for this is far from clear. Real interest rates already hovering close to zero and, more importantly, preliminary data for Q1-FY06 suggests that the pace of private sector credit off-take is slowing. Thus, given the lags in the transmission of monetary signals, a significant additional tightening of monetary policy could run the risk of inducing recessionary pressures in the economy''"

Read Comments