Muhammad Soban

Pakistan’s inflation rate is surging and expected to rise more in a couple of months due to the energy subsidy reversal, said Deputy Governor State Bank of Pakistan (SBP) Dr. Murtaza Syed, reports WealthPK. As the week ended on Friday, the weekly inflation hit a record high of over 42 percent, and the benchmark CPI inflation spiked to a 14-year high at around 25 percent in July.

In an interview, Dr. Murtaza Syed said the Monetary Policy Committee had unanimously decided to maintain the policy rate at 15 percent because of few developments on the domestic and external fronts. He said domestically, there were three factors. First of all, while headline inflation did rise last month, this was anticipated and was largely due to the necessary reversal of unsustainable energy subsidies. But encouragingly, it has been observed that the business expectations of inflation have declined sharply.

The second key domestic development was the overheating domestic economy cooling nicely. Sales of petroleum products, cement, fertilizers, autos, and real private sector credit have declined monthly. And the external position has also improved over the last few weeks. Trade deficit fell by half to $1.2 billion in July from $2.2 billion in June, and the rupee rallied quite strongly and has been among the best-performing currencies in August.

On the external side, there were two things that the SBP is watching, Dr. Murtaza Syed added. First of all, global commodity prices and the dollar have retreated in recent weeks because there is some sense that perhaps the global slowdown is a little sharper than anticipated, and the markets are reassessing how sharply the Fed will be increasing interest rates. Over the last few months, the central banks of emerging countries have started to put rates on hold, including very vulnerable countries like Sri Lanka, Ghana, and Zambia.

So, given all of this, the MPC decided to stay on hold and wait and see how the cumulative tightening of 800 basis points that the SBP has injected into the system since last September and also this year’s strong fiscal consolidation that is planned affect domestic demand and inflation and see how global commodity prices and global interest rates move and then reassess in six weeks in the next monetary policy committee meeting.

Dr. Syed said according to the SBP forecast, inflation will surge more in the next couple of months and then come down slowly. It is expected that inflation will remain at 18 to 20 percent for the rest of this year but in the next year, it will decline sharply because of the effect of tight monetary and fiscal policies and normalization of global commodity prices.

Credit: Independent News Pakistan-WealthPak