Tag: global commodity prices

Pakistan informs IMF of preparedness to address near-term challenges

In a recent communication to the International Monetary Fund (IMF), the government has underscored its preparedness to address potential near-term challenges, signalling a commitment to maintaining economic stability.

The disclosure comes as part of the IMF’s first review under the stand-by arrangement.

The government, as revealed in the report, stands ready to respond decisively should near-term price pressures reemerge. This includes addressing stronger-than-expected second-round effects on core inflation and potential pressures on the exchange rate amid the normalisation of the current account.

Amid signs of weaker demand, positive supply developments, and decreasing pressures on the exchange rate, the government anticipates a notable decline in inflation in the coming months.

As a result, the policy rate was maintained at 22 per cent during the latest Monetary Policy Committee (MPC) meeting held on October 30. However, the government reiterated its readiness to respond promptly if there is a resurgence of near-term price pressures.

The primary objective is to ensure a clear downward trajectory for inflation and inflation expectations. The pace of future adjustments will be contingent on various factors, including inflation data, exchange rate developments, external position strength, and the fiscal-monetary policy mix.

The government aims to keep the real policy rate in positive territory on a forward-looking basis, signalling a commitment to bringing inflation within the target band by fiscal year 2026.

To enhance monetary policy transmission, the interest rate on major refinancing schemes, specifically the EFS and LTFF, will continue to be linked to the policy rate, with a spread of no more than 3 per centage points, as per the announcement by Pakistani authorities.

The report emphasised the importance of vigilance, highlighting that despite the return of the forward-looking real policy rate to positive territory, caution is necessary due to near-term risks.

With inflation expectations not yet firmly anchored, the Monetary Policy Committee is urged to respond robustly and promptly should inflationary pressures resurface.

Maintaining a positive real policy rate during a period of easing inflation and promptly addressing signs of new demand pressures or rising inflation expectations is seen as crucial.

This strategy aims to re-anchor inflation expectations and guide down core inflation from the second half of fiscal year 2024 onwards, contingent on the absence of a resumption in administrative import compression.

The report projects a significant decline in headline inflation through fiscal years 2025–26, aligning within the targeted 5–7 per cent range by fiscal year 2026. This outlook is supported by fiscal consolidation efforts and the normalization of global commodity prices.

While the IMF staff views the current stance as broadly appropriate given weak domestic demand, the report suggests that the MPC should remain prepared to respond resolutely if near-term price pressures reemerge, including second-round effects.

January 21, 2024
December inflation may surpass 30% due to gas price hike

In December, inflation is expected to surpass the 30 per cent threshold, driven by the recent increase in gas prices and the persisting adverse base effect, which continues to impact the consumer price index (CPI).

The headline inflation for December is projected to settle at approximately 30.11 per cent year-on-year (YoY) and 1.18 per cent month-on-month (MoM), in contrast to the previous month’s figures of 29.2 per cent YoY and 2.7 per cent MoM.

This monthly inflation rate is significantly lower than the 12-month average of 2.17 per cent MoM.

Consequently, the average yearly inflation for the first six months of FY24 is estimated to be 28.87 per cent YoY, compared to 25.05 per cent YoY in the same period of FY23.

The surge in inflation can be attributed to the adverse base effect and the notable increase in gas prices, which were not fully realised in the previous month.

Conversely, food inflation is expected to exhibit a marginal decrease of 0.29 per cent MoM, driven primarily by the decline in prices of tomatoes, potatoes, chicken, and oil.

Additionally, the transport index is forecast to undergo a 4 per cent MoM decrease, mainly due to the relief in petrol and high-speed diesel (HSD) prices.

Post-December, inflation is anticipated to decline at a relatively faster pace, supported by the favorable base effect, the delayed impact of monetary tightening, and other administrative measures.

The December spike is attributed to the lingering effects of the overdue gas price hike. Notably, unforeseen climate events, volatility in global commodity prices, especially oil, and external account pressures pose significant upside risks to the inflation outlook.

Global oil prices are on the rise amid challenges in Red Sea shipping, potentially threatening the inflation outlook.

Moreover, the successful completion of the International Monetary Fund (IMF) review, coupled with additional loan programmes, remains crucial.

The outstanding amount of $1.8 billion under the stand-by arrangement (SBA) is yet to be released.

The accompanying chart illustrates the yearly inflation trajectory based on different MoM CPI scenarios. At 0.5 per cent and 1 per cent MoM CPI, yearly inflation is projected to fall below the 22 per cent policy rate by February–March 2024.

By the end of FY24, with 0.5 per cent and 1 per cent MoM CPI, it is expected to decrease to 15.29 per cent and 19.37 per cent, respectively, a significant change from the previous month’s forecasts of 12.9 per cent and 17.5 per cent.

Considering the last 12-month average of 2.17 per cent MoM, the real interest rate is anticipated to remain in negative territory by the end of FY24.

December 27, 2023
State Bank keeps policy rate unchanged at 21%, eyes decline in inflation

The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) has made the decision to maintain the policy rate at 21 per cent for the next two months. This move is based on the committee’s anticipation that inflation will begin to decrease starting this month.

1/3 At its meeting today, Monetary Policy Committee (MPC) of #SBP decided to maintain the policy rate at 21%.https://t.co/mjQgHmMd3B #SBPMonetaryPolicy pic.twitter.com/4GX5J8AahI

— SBP (@StateBank_Pak) June 12, 2023

During its previous meeting in April, the MPC had raised the key policy rate by 100 basis points to a record high of 21 per cent in order to control inflation. Since January 2022, the SBP has increased rates by a total of 1,150 basis points.

In a press release issued today, the central bank highlighted that the higher inflation figures for April and May were in line with expectations. The committee also observed a sequential decrease in inflation expectations among consumers and businesses, following recent peaks.

Furthermore, the MPC predicts that domestic demand will remain subdued due to tight monetary policy, domestic uncertainties, and ongoing pressure on the external account. Given this context and the declining month-on-month trend, the committee expects inflation to have reached its peak at 38 per cent in May 2023, with a subsequent decline anticipated from June onwards, barring any unforeseen developments.

The committee acknowledged several significant developments that have occurred since its previous meeting. Firstly, provisional national accounts estimates indicate a considerable deceleration in real GDP growth during FY23. Secondly, the current account balance registered consecutive surpluses in March and April 2023, alleviating some pressure on foreign exchange reserves.

Thirdly, the government unveiled the budget for Fiscal Year 2023-24 on June 9, which outlines a slightly contractionary fiscal stance compared to the revised estimates for FY23. Lastly, global commodity prices and financial conditions have recently eased and are expected to persist in the near term.

The Monetary Policy Committee also evaluated the cumulative impact of the substantial monetary tightening implemented thus far, which is still unfolding. Overall, the committee believes that the current monetary policy stance, characterised by positive real interest rates on a forward-looking basis, is appropriate for anchoring inflation expectations and bringing down inflation towards the medium-term target, barring any unexpected domestic or external shocks.

However, the committee emphasised that this outlook is contingent upon effectively addressing prevailing domestic uncertainties and external vulnerabilities.

The committee noted that the major drag on real GDP growth, which increased by 0.3 per cent in FY23 compared to the revised growth of 6.1 per cent in FY22, stemmed from a significant contraction in the value addition of the industry due to various adverse domestic and external factors.

The services sector also experienced its slowest growth pace since the COVID-impacted FY20. However, the agriculture sector demonstrated growth lower than the previous year but better than post-flood expectations, driven by bumper sugarcane and wheat crops and robust growth in the livestock sector, which compensated for flood-related damages to cotton and rice crops.

The MPC further highlighted that the slowdown in economic activity aligns with trends observed in high-frequency indicators, particularly double-digit declines in auto, petroleum, and domestic cement sales volumes, as well as contraction in large-scale manufacturing throughout this fiscal year.

These trends are expected to persist in the near term due to the accumulated impact of tight policies. Conversely, barring any unfavorable weather conditions, the agriculture sector is expected to exhibit improved performance compared to the outgoing fiscal year, according to the committee.

June 13, 2023