RECORDER REPORT

KARACHI: Despite some surge during the first quarter, the CPI inflation is expected to remain within the target of 6 percent for the year 2016-17 (FY17).

The State Bank of Pakistan (SBP) in its first quarterly report “The State of Pakistan’s Economy” said that the average headline CPI inflation rose to 3.9 percent YoY in Q1-FY17, against 1.7 percent in the corresponding period of FY16.

According to the report, this increase was expected as inflation had already dipped to ultra-lows last year; a further push came from supply-side factors, which included a gradual rise in international prices of some key commodities.

“An uptick was already expected in inflation during FY17. The recent revival of global oil prices after OPEC’s agreement on oil supply may lead to higher non-food inflation. On the other hand, food inflation may remain in check as the current stocks of staple food (wheat and rice) seem sufficient. On balance, therefore, inflation is expected to remain within the target for the year”, it added.

SBP has also been closely watching a gradual rise in CPI inflation and developments in the external sector, like falling exports, rising imports and declining remittances

While trends in actual inflation were important, from policy perspective, SBP was also closely tracking changes in inflationary expectations in the economy. The Consumer Confidence Survey for September 2016 reflected lower expectations about prices for the next six months.

The moderate inflation expectations were because of: (1) the government did not increase petroleum prices and power tariffs, despite an increase in global oil prices; and (2) the exchange rate – an important anchor for inflation expectations – remained stable during the quarter. The stability in the exchange rate, in turn, came on the back of healthy financial inflows. These inflows not only covered a worsening current account and declining foreign investment, but also led to a buildup in foreign exchange reserves for the 8th consecutive quarter.