The State Bank of Pakistan forecasts average inflation for fiscal year 2011/12 to be between 14.5 and 15.5 per cent.

KARACHI: Pakistan's inflation outlook is a cause for concern while increasing the tax base is the toughest structural reform to implement, the country's central bank said in its quarterly report on Friday.

“The outlook for inflation is not heartening ... We fear that inflationary expectations are being ingrained,” the report said.

The bank on Saturday left its key policy rate unchanged at 14 per cent for the next two months, citing a smaller current account deficit and lower government borrowing in saying that immediate risks to macroeconomic stability had subsided.

The report said local fuel prices would have to rise to reflect international oil prices, due to a lack of fiscal space available, which would add to inflation.

On the fiscal side, the central bank forecasts the budget deficit for the year ending June 30 to be between 5.5 per cent to 6.5 per cent of GDP, compared with the government's target to keep it under 5.5 per cent of GDP.

“We still think government's revenue targets are ambitious,” the SBP said adding that broadening the tax base was the toughest structural reform to implement and “one that needs the greatest political will.”

The central bank maintained its growth forecast of 2 to 3 per cent for fiscal year 2010/11.