‘Fuel price hike to hit inflation outlook’
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KARACHI: The financial markets are now bracing for a disruptive impact on inflation that is likely to come from the recent large upward revision in fuel prices.
“The increase in petroleum prices is massive and will be disruptive for the outlook on inflation,” said BMA Capital Management Executive Director Saad Hashmey.
The government on June 26 increased the prices of all petroleum products by up to Rs26 per litre. Rate of petrol was raised by Rs25.58 to Rs100.1 and diesel to Rs101, from Rs80 per litre.
When asked about the impact of the fuel price hike on inflation outlook, the State Bank of Pakistan would only say that price level projections are made at the time of the Monetary Policy Committee meeting.
“We typically announce inflation projections or any revision in it at the time of Monetary Policy.”
The SBP has been cutting the key policy rate at a historic rate, slashing it by a cumulative 625 basis points since mid-March to bring it down to seven per cent in an extraordinary, unscheduled, monetary policy announcement on June 25, the day before the fuel price hike was notified.
In a statement accompanying that announcement, the SBP said “the moderation of underlying inflation has continued” since the rate cuts began, adding “[r]ecent SPI data also suggests continued moderation in overall price pressures in June.”
For months now, as it slashed rates, the SBP has been citing falling oil prices as an important factor in moderating the pace of inflation. In mid May, when it announced a 100bps cut in the interest rate, the central bank cited a sharp reduction in fuel rate as the main reason behind a further easing in consumer price index.
“[T]he government has significantly reduced petrol and diesel prices by 30-40pc in response to the continued fall in global oil prices, which has improved the outlook for inflation,” the monetary policy of May 15 said. In the latest statement issued on Friday, one day before the rate cut, the SBP said it expects price levels to fall below the projected band of 7-9pc.
Today that reduction has been almost entirely rolled back in one go, with prospects of a further hike in the days to come as international oil prices show no signs of softening.
Financial market players now believe the massive fuel price hike could well upset that forecast of “continued moderation” in inflation.
“The recent sequence of events is confusing,” said Hashmey. “We see a rise in bond cut-off yields, 100bps cut in interest rates followed by a large increase in petrol prices that could lead to upper adjustment in inflation expectations,” he said, which could make it difficult to see how this forecast can be sustained.
Other analysts took a more muted line. For example, Arif Habib Securities Director Research Tahir Abbas said the direct impact from fuel prices is not likely to be very large, but the indirect effect could be.
However, he is careful to emphasise that much of the second-round impact from the reduction in fuel prices back in May had not yet worked its way through the system, so the disruptive effect from the current hike may be muted. “Yes, inflation is expected to inch up due to increase in petroleum prices,” he tells Dawn, saying the SBP’s contention that price levels could fall below 7pc might now be difficult to envision. “We expect FY21 inflation to be between 7 and 7.5pc,” he says.
Published in Dawn, June 30th, 2020
