LAHORE: In line with the recent price trends that suggest a significant pickup in inflationary pressures, the headline inflation in April is estimated to clock in at around 11 per cent, up from 8.53pc a year ago and from 9.1pc the previous month.

It is for the first time during the ongoing fiscal year that analysts are estimating Consumer Price Index (CPI) to cross into double digits. “Inflation was largely expected to arrive in the double-digit territory this month,” Hamza Kamal, an analyst at AKD Securities in Karachi, told Dawn on Tuesday.

He expects CPI inflation to stay in the double digits through June before it begins to cool down from the start of the next financial year, saying annualised inflation rate would average 9pc, or towards the higher side of the central bank’s projected range of 7-9pc for the ongoing fiscal year.

Some analysts fear that the increase in the food rates, administered energy prices — included the hikes in the power tariff, rise in global oil coupled with an enhanced petroleum surcharge target for the next fiscal year and the potential impact of other budgetary measures under the revived IMF programme could further exert upward pressures on CPI inflation for a longer period.

The sharp rise in inflation is driven primarily by a spike in food prices on increased demand during Ramazan, quarterly house rent adjustment during the month and low base effect (since the index value had fallen to 130.6 in April last year in the wake of the Covid-19 pandemic).

After having hit a low of 5.7pc in January during the ongoing fiscal year, the headline inflation resurged to 8.7pc in February and 9.1pc in March — again driven by the low base effect and higher food prices.

The weekly Sensitive Price Indicator (SPI), which assesses the price movements of 51 essential items in 50 markets from 17 cities, rose by 18.4pc and 18.9pc year-on-year in the first two weeks of the current month before easing to 17.7pc in the third week shows significant surge in the rates of wheat flour, chicken, tomatoes, fruit, potatoes, sugar, eggs, edible oil, clothing and footwear and a few other items.

Interest rate expectation

Growing inflation expectations notwithstanding, analysts agree that the State Bank of Pakistan (SBP) will likely continue to pursue its accommodative policy stance to support economic recovery and growth given the surging third wave of the Covid-19 pandemic.

In its last monetary policy statement, the bank stated that the increase in the rates would be measured and gradual, suggesting it would continue to support growth as long as it takes.

“Initially, the market thought the central bank could hike the policy rate by 50bps as inflationary pressures in the economy gained steam. The rapid spread of the virus infections in the last several weeks has nevertheless changed the sentiment. Now the central bank is widely expected to hold the rate steady at 7pc in its next monetary policy review,” Dr Amjad Waheed, chief executive officer of NBP Funds, told Dawn.

Besides the resurgence of the pandemic, the appointment of Shaukat Tarin, a vocal supporter of low interest rates, as the new finance minister is also believed to have played a major role in changing the market expectations.

The declining T-bill yields in the last two auctions confirmed the change. The cut-off yields on the three-month and six-month debt were down on April 22 by 7bps and 11bps to 7.4pc and 7.69pc.

A Topline Securities note on Friday pointed out that the bond yields in the secondary market had come down by 12-65pps from March 11, suggesting the market’s view that the new Covid-19 wave could potentially delay a hike in the rates.

“The central bank will likely keep the rates steady to support the economy amid resurgence of the third Covid-19 wave, comfortable balance of payments position with the dollar inflows estimated to remain higher than the dollar outflows over next one year to one and a half years, and absence of demand pressures in the economy,” Mr Kamal observed.

The central bank had aggressively slashed interest rates by 625bps to 7pc between March and June last year to counter the fallout of the Covid pandemic on the economy and the businesses. Since then, the real interest rates remain negative with the gap between policy rate and CPI inflation rate for this month approaching 4pc. The IMF too expects accommodative policy to continue till stable economic recovery is achieved.

“The central bank will focus on economic recovery, emphasising potential headwinds to recovery from the rising Covid-19 rather than transitory higher inflation outlook as inflation will drop to single digit from July onwards,” Dr Waheed contended.

Published in Dawn, April 28th, 2021