KARACH, Feb 20: Pakistan’s core inflation rose at the rate of 7.53 per cent during July-Jan 2005-06, according to the data released by the State Bank of Pakistan. During this period, overall consumer inflation or inflation measured by 374-item consumer price index went up by 8.48 per cent.
In fiscal year July-June 2004-05, core inflation had increased at an average rate of 6.95 per cent when overall inflation had recorded an average increase of 9.3 per cent. The central bank needs further tightening in its monetary policy to keep core inflation in check which is very much required for containing overall inflation. It needs to do so also, because if core inflation remains at a high level it means that the monetary policy, which influences core inflation rather more directly, has met only limited success in containing inflation.
It is quite disturbing that year-on-year increase in core inflation between July-Jan 2005-06 remained above seven per cent—reaching the peak of 7.81 per cent in October 2005 and falling to the lowest level of 7.34 per cent in January 2006. But during this period core inflation has shown a consistent, yet modest, falling trend after peaking at 7.81 per cent in October last year: in January 2006 core inflation showed a YoY increase of 7.34 per cent. It proves that a tight monetary policy is paying dividends. But since core inflation has remained above seven per cent throughout this fiscal year, there is a need for not only continuing a tight monetary policy but also making it tighter. The SBP monetary policy statement for January-June 2006, issued late last month, and subsequent interpretation of this statement by SBP Governor Dr Shamshad Akhtar, leave not doubt about it.
During the first half of the current fiscal year i.e. between July-December 2005, the SBP increased the benchmark six-month Treasury bills yield by 30 basis points. It also kept the inter-bank liquidity levels reasonably low through frequent open market operations. This, in turn, pushed up Karachi inter-bank offered rates or Kibor and had a subsequent impact on banks’ lending rates. The central bank did all this as part of a strategy to check inflation without hurting economic growth sentiments.
It has taken up the same task to perform during the second half of the fiscal year but has, so far refrained from increasing the yield on six-month T-bills, though it continues to suck excess liquidity from the banking system through OMOs. Senior SBP officials say the SBP would rather wait for inflation numbers for the current month, which would be out in mid-March before increasing the six-month T-bills rate or changing its discount rate.
For the current fiscal year, the target for CPI inflation is eight per cent and the target for economic growth is seven per cent. Year-on-year CPI inflation in six out of seven months of the current fiscal year has remained above eight per cent: the only exception was November 2005, when it had fallen to 7.89 per cent. If inflation data for February also shows continuity in the trend, SBP may be constrained to further tighten its monetary policy that may also reflect in an increase in its discount rate, or, the central bank may at least allow moderate yet persistent increases in its six-month T-bills yield, which currently stands around 8.3 per cent.
The SBP had last increased its discount rate by one and half a percentage points to nine per cent in April last year, after keeping it unchanged at 7.5 per cent for sixteen months. Regardless of whether the SBP would raise its discount rate or allow gradual hikes in T-bills yields or do both—chances are that it would act in March or April after analyzing inflation data of February and March.