KARACHI: The unexpected massive increase in petrol and diesel prices was widely felt as inflationary at the retail level and the State Bank of Pakistan (SBP) may have to review its decision of leaving the key interest rate unchanged.

Many analysts believe that the inflation would be in the range of 30-31 per cent in the ongoing month which is against the SBP’s expectation to bring it down to 20-22pc.

After keeping its policy rate unchanged at 22pc by the central bank on Sept 14, the government increased the petroleum prices by over Rs26 per litre making it clear that inflation would be higher in September.

“The inflation in September would be around 30-31pc but the State Bank expects the average inflation for the FY24 would be 20 to 22pc. I believe the inflation will come down as per the expectations of the SBP,” said Tahir Abbas, head of Research at Arif Habib Limited.

The question, however, remained unanswered who stopped the State Bank from increasing the interest rate when the cut-off yields for three-, six- and 12-month were increased to 24.5pc, 24.8pc and 25pc, respectively, at treasury bills auction held on Sept 7. This was a clear indication that the SBP was going to increase the interest rate but changed the idea just before the final decision.

“In my view, the SBP has already removed inflation projections from the current monetary policy statement, it seems that it is known that the previous inflation projection of 20-22pc will not be met as global commodity prices are being passed on in the local market,” said a senior analyst not willing not to be identified.

He said if the exchange rate could not be kept under control like being done these days, the inflation could hit as high as 40pc.

“Given the better expectation of agriculture output alongside lower than expected current account deficit for August, the SBP kept the interest rate unchanged at 22pc. Moreover, the SBP, in its analyst briefing, states that they have already incorporated higher oil prices in their inflation projections, and it is expected that FY24 inflation to remain between 21-22pc,” said Mr Abbas.

The SBP also mentioned that the dollar supply in the open market has increased due to the government’s crackdown against currency hoarders, he said.

Another economist said the increase in interest rates would not impact demand for financing (which is already low) and would not have unlocked supply as hoarders, speculative buyers and people with black money are immune to higher rates as they usually keep money in cash.

“It can be interpreted that the nature of the current economic ills is not demand-driven. There are supply-side issues, fiscal mismanagement and speculative trends,” said Faisl Mamsa, CEO of Tresmark.

Whereas the government expenses go up meteorically (being the largest borrower) and in a vicious cycle impact inflation. “Interest rates are at their highest in Pakistan’s history anyway, so taking administrative measures will be a more practical way out,” said Mr Mamsa.

Published in Dawn, September 17th, 2023

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