Inflationary pressure rise SBP to consider tightening monetary policy

By Muhammad Toori

KARACHI: The central bank has assured the International Monetary Fund (IMF) that it will monitor inflation carefully and if inflationary pressures persist, the monetary policy will be tightened, a statement issued by the IMF mission said.
"The State Bank will monitor inflation carefully and if inflationary pressures persist, monetary policy will be tightened, as needed," the IMF said.
Monetary policy will continue to focus primarily on price stability, while building international reserves, it said and added that inflation has been more persistent than expected, due to higher administered prices and higher inflationary expectations. In its report over Pakistan economy last month it said that inflation pressures have not yet abated. Headline and core inflation (Y-o-Y) dropped in October to 8.9 and 11 per cent, respectively, in part due to the favourable base effect from peak inflation last year, but headline inflation rose to 10.5 per cent in November while core inflation continued to decline and reached 10.6 per cent. The rebound in inflation was due to recent food and petroleum product price increases and the electricity tariff hike in October.
The inflation outlook for full FY10, nevertheless, remains somewhat susceptible to fiscal consolidation efforts and to incipient international commodity price pressures. These include already announced and planned increases in electricity and gas prices. Added to these developments are the difficult-to-assess negative impact of law and order situation and power shortages on the productive capacity of the economy.
These factors influence people's expectations of future price level trends and impart stubbornness to inflation.
The likelihood of an uptick in inflation in the remaining months of FY10 thus seems quite plausible. Based upon these considerations, SBP expects the average CPI inflation for FY10 to remain between 11 and 12 per cent.
Striking a balance between positive macroeconomic developments and ongoing economic challenges, in the first half of FY10, central bank eased the policy rate by a cumulative 150 basis points and then in January Monetary Policy statement it kept discount rate at 12.5 per cent.