KARACHI: Some 7 to 9 percent inflation projection for this fiscal year has multiple upside risks like higher global commodity prices and upward revision in utility tariffs on the domestic front, the State Bank of Pakistan (SBP) said in its annual report issued on Wednesday.
According to the report, the national CPI inflation is expected to remain within a range of 7.0 to 9.0 percent during this fiscal year.
“Better commodity management practices, especially the build-up of reserves for wheat and sugar, would likely contain supply-side pressures from seeping into the inflation during FY22”, it added.
The report said that, importantly, headline inflation is expected to retreat more visibly in the second half of the year, with the phasing out of the base impact of the hike in power tariffs. However, the SBP said, these projections are subject to multiple upside risks, including from a greater-than-anticipated increase in global commodity prices and upward revision in utility tariffs. In addition to triggering a sharp increase in domestic prices, these developments may also give rise to significant second-round impacts on inflation.
During the last fiscal year, average headline CPI inflation fell to 8.9 percent FY21 compared to 10.8 percent last year. It was within the SBP’s forecast range of 7-9 percent. The resurgence in domestic demand did not translate into inflationary pressures amidst the presence of some spare capacity in the economy.
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However, inflation remained volatile during the year, because of the impact of the increase in fuel prices and power tariffs. Moreover, the food group emerged as the largest contributor to inflation during FY21, primarily because of supply-side challenges in non-perishable items.
The category-wise breakdown suggests that food inflation remained the major contributor to headline inflation in both urban and rural areas, whereas underlying inflationary pressures (reflected in NFNE) were largely stable during the last fiscal year. Item-wise analysis reveals that around 75 percent of the inflation was concentrated in a handful of commodities pertaining to energy and food groups.
Keeping in view the need to nurture the recovery, the supply-side and concentrated nature of inflation and uncertainties posed by the pandemic, the Monetary Policy Committee (MPC) considered it appropriate to continue with the accommodative stance throughout FY21. To provide necessary support to the ongoing recovery process, the policy rate was kept unchanged at 7 percent amid well-anchored inflation expectations and subdued underlying inflationary pressures during FY21.
It may be mentioned here that the MPC has recently increased the key policy rate by some 1.50 percent to 8.75 percent to address the rising inflationary pressure on the economy and contain the higher external deficit.
Copyright Business Recorder, 2021