Fall in commodity prices pushes inflation further lower

CPI hits 2.1%, sparking expectations of another interest rate cut

ISLAMABAD: The pace of annual inflation further slowed down to 2.1% in April and it remained glued to an 11-and-a-half-year low, raising the chances of a third cut in the key discount rate in less than a year in the upcoming monetary policy announcement.

Inflation measured by the Consumer Price Index (CPI) rose just 2.11% in April over the same month of previous year, the Pakistan Bureau of Statistics (PBS) announced on Monday. In March, inflation was recorded at 2.5%.

Last time, the CPI stood that much lower was in October 2003 when it touched 2.18%. The CPI captures movements in prices of 481 commodities in retail markets in urban areas of the country every month.

It was the sixth consecutive month when the index stood at the 11-and-a-half-year low on the back of reduction in commodity prices in the international market and improvement in supplies of perishable food items in the domestic market. The new inflation rate was in line with expectations of market analysts.

This has provided a rare opportunity for the central bank to further lower its benchmark interest rate, although the International Monetary Fund (IMF), which is providing assistance to Pakistan under a $6.7 billion loan programme, has been advocating a cautious monetary stance aimed at building foreign currency reserves.

In the last monetary policy, the SBP cut the key policy rate to a 13-year low of 8% – a move widely welcomed by the market but was below expectations.

“The SBP may further slash the discount rate to 7.5%,” said an official working with the central bank. The next policy announcement is expected in a couple of weeks.

However, despite the decline in interest rates, capital was not adequately available to the private sector as the government remained the largest borrower in the first 10 months of the current fiscal year.

As of April 17, the government’s net borrowings were Rs470.6 billion, higher by Rs282 billion from the comparable period of previous year.

Credit to the private sector amounted to only Rs173 billion, which was Rs150 billion less than the corresponding period of previous fiscal year. On the one hand, the private sector is being edged out of the market while on the other hand the Federal Board of Revenue is blocking Rs220 billion worth of refund claims of taxpayers to show inflated revenue figures.

Underlying inflationary pressures have largely eased as the fuel and food-adjusted inflation, called core inflation, also slowed down. There was a reduction of half a percentage point in a single month and core inflation was 5.4% year-on-year in April. It has eased for the eighth consecutive month.

With core inflation coming down to 5.4%, the real interest rate has become 2.6%. The trimmed inflation – calculated after excluding top 20% products showing an increase in prices and top 20% items displaying a decrease in prices, stood at 3.7%. It is an indication that inflationary pressures are easing.

According to the PBS, prices of food and non-alcoholic beverages group decelerated 1.53% in April. There was a reduction of 8.5% in rates of perishable food items last month over a year ago.

Average inflation in the first 10 months (July-April) of the current fiscal year rose 4.8%, falling below 5% for the first time in years, according to the PBS. For the new fiscal year, the government has set the inflation target at 8%, which is likely to be achieved on the back of lower commodity prices in the international market.

A reduction in pries of petroleum products remained the main driving force behind the steep decline in the overall inflation index.

The Asian Development Bank has projected that the overall headline inflation will remain around 5.5% in the current fiscal year ending June 30.