The State Bank of Pakistan (SBP) has reduced its forecast for headline inflation to a range of 10 to 11 percent for the fiscal year 2014. According to SBP''''s first quarterly report, although SBP has reduced its forecast for inflation, it is still higher than the target of 8.0 percent set by the government. SBP is also expecting an increase in the NFA followed by government''''s estimated foreign inflows. This increase would largely substitute for the budgetary borrowings from SBP and a moderate growth in reserve money, albeit with a significant change in its composition.
"A more balanced composition of reserve money would help contain inflationary expectations in the economy, which may also get some support from the relative stability in the PKR parity in Q2-FY14," it added. Unchanged petrol prices during the last 3 months, and the recent decline in prices of perishable food items have brought back headline inflation to a single-digit. Nonetheless, some upside pressures still persist from the external deficit; a further increase in energy tariffs that are also required as part of the IMF program; and the recent surge in global commodity prices.