State Bank of Pakistan Clarifies Uncertainties Over Inflation Forecast

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The State Bank of Pakistan (SBP) has categorically invalidated some sections of the media, which published ill-informed interpretations of the central bank’s inflation forecast.

According to a press release issued by the central bank, “SBP’s average inflation forecast of 7-9 percent in FY22 is being interpreted as the “inflation target” and being compared to the inflation targets of other countries. This is incorrect.”

SBP explained that its inflation forecast represents projections for the current fiscal year. On the other hand, Pakistan’s inflation target is set by the government and is 5-7 percent. This target is to be achieved over the medium term, and the associated monetary policy is anchored on achieving the government’s inflation target over the medium term, i.e., over the next 18-24 months.

It bears mentioning that on Friday, SBP stated that inflationary pressures had increased considerably since the last MPC meeting, “with headline inflation rising from 8.4 percent (y/y) in August to 9 percent in September and further to 9.2 percent in October, mainly driven by higher energy costs and a rise in core inflation.”

Looking ahead at that time, SBP remarked how global commodity prices and potential further upward adjustments in administered prices of energy pose upside risks to the average inflation forecast of 7-9 percent in FY22. “The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth, and stands ready to respond appropriately,” added the central bank.

The subject of inflation has recently picked up the pace on the back of developments that saw the SBP raise the policy rate by 150 basis points to 8.75 percent from 7.25 percent. The revision was brought forward in light of recent unforeseen developments that have affected the outlook for inflation and the balance of payments and to reduce the uncertainty about the monetary settings in the market.

“With risks rotating from growth to inflation and the current account faster than expected, there is now a need to proceed faster to normalize monetary policy to counter inflation and preserve stability with growth. The rate increase is a material move in this direction,” an SBP statement stated.



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