KARACHI: State Bank of Pakistan (SBP) may further raise benchmark interest rate by 2 per cent to 18 per cent from existing 16 per cent during next six months owing to high inflation, analysts said on Tuesday.
The analysts at Insight Securities (Pvt) Limited said that Non-Food Non-Energy (NFNE) inflation had witnessed remarkable rise of around 800 basis points during last 12 months.
Since the start of this monetary tightening cycle where central bank has raised policy rate by 9 per cent or 900 basis points, benchmark rate has moved in tandem with core inflation which currently stands at 16.4 per cent versus policy rate of 16 per cent.
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Going forward, they expect SBP will continue to monitor core inflation for its monetary policy settings.
“We believe that policy rate is likely to increase by further 150-200bps (1.5 per cent to 2 per cent) in next 6 months due to potential upside risk to core inflation amid inevitable adjustment in PKR/USD parity and upcoming hike in energy tariffs.
The analysts have revised their estimate for fiscal year 2022-2023 inflation to 24.3 per cent as compared to earlier estimate of 22.5 per cent. “There are multiple upside risk to inflation estimates, therefore we opine that these estimates are conservative and actual inflation for FY23 might surpass 25 per cent,” they added.
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The inflation monster continues to roar on the back of higher energy prices, PKR devaluation, elevated food prices (led by supply side constraints) and imprudent administrative measures.
Headline inflation clocked in at 19.7 per cent in last 12 months versus 9.5 per cent in same period last year (SPLY). Inflation print for December 2022 clocked in at around 24.5 per cent, taking first half of fiscal year 2022-2023 average inflation to 25 per cent.
Similarly, core inflation also remained elevated and witnessed a YoY increase of 14.7 per cent and 18.9 per cent for urban and rural baskets, respectively.
Given the current economic turmoil, rebottling of inflation genie seems a distant dream as Pakistan is going through severe external crisis and awaiting IMF’s nod for the ninth review of the program which has been pending for few months now due to lack of actions on certain conditions.
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IMF is pushing for much needed reforms in energy sector along with rationalization of tariff for gas and electricity. Furthermore, IMF’s key demand is market based exchange rate which is currently being managed through administrative measures, resulting in huge disparity between open market rate and interbank rate.
These administrative measures are also adversely affecting the supply side of the equation resulting in shortages in domestic market. The confluence of all these factors poses significant upside risk to inflation estimates.
Moreover, the currency crisis brewing in the country is not sustainable as the spread between unofficial rate and interbank rate has widened to 15 per cent.
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The current unofficial peg is not going to last long and adjustment in PKR/USD parity will have far reaching impact on the prices of food and petroleum products.
As per our estimates, increasing petrol price to PKR265/ltr and diesel price to PKR300/ltr, will increase average inflation for 2HFY23 by 125 basis points.
The higher petroleum price will seep into food prices resulting in more misery for commoners. All these factors have second round effect which is likely to creep into core inflation, which tends to be more sticky and resilient.
The analysts expect January 2023 inflation to remain upbeat owing to higher chicken prices up by 16 per cent MoM and wheat prices up by 7 per cent MoM.
The chicken prices are sky-rocketing in domestic market amid supply chain crisis in poultry sector due to restriction on imports of soybean. To note, chicken prices are up by 40 per cent since November 2022.
Similarly, the prices of wheat flour have risen sharply in last couple of weeks due to delay in import and disparity in support prices. The analysts said CPI for January 2023 is likely to clock at 25.5 per cent vs. 12.9 per cent in SPLY, primarily led by 39 per cent rise in food index together with 40 per cent rise in transport index.