KARACHI: A government decision to raise oil prices by more than 8% on Saturday would add short-term pressure to stubbornly high inflation, which could call into question the central bank’s accommodative stance and the low policy rate adopted to stimulate the economy affected by the pandemic, analysts said.

Local increases in energy prices triggered by high international commodity prices have rekindled fears about inflation, threatening to overturn the Bank’s Consumer Price Index (CPI) forecast. State of Pakistan (SBP) from 7 to 9% for fiscal year 2021/22.

The SBP could lower the cost of borrowing to close to double digits for the remaining months of the current fiscal year.

The government raised rates on all petroleum products as oil prices climbed to around $ 85 a barrel on the international market. The prices of gasoline and diesel increased by Rs 10.49 and Rs 12.44 per liter, respectively.

“The rise in global commodities (prices) and the taxes imposed by the IMF will certainly affect the CPI. We now think the CPI could go above 9%. This will result in a higher interest rate, ”said Mohammed Sohail, CEO of Topline Securities.

The fall in the rupee has opened the door to imported inflation. Volatile global prices for crude oil, edible oils, food, coal and metal products, as well as a 12% currency devaluation since May, have added to inflationary pressures, which were seeping into the economy. local prices, a major problem for the majority. Pakistanis.

Dr Ashfaque Hasan Khan, former finance ministry adviser and renowned economist, said the rise in domestic oil prices was linked to international energy prices as demand accelerated across the world due to the economic recovery after the coronavirus pandemic, but it was the currency devaluation that pushed inflation up in the country.

“The government is increasing the prices of petroleum products to increase the collection of petroleum development tax,” Hasan said.

It forecasts a 50 basis point hike in the key rate during the next SBP policy review scheduled for November 26. However, he said there was no justification for a hike, as urban core inflation registered at 6% year-on-year in September.

Analysts believe that rising energy prices and electricity tariff adjustments made the government unpopular among the masses, but the government would still abide by the harsh conditions imposed by the International Monetary Fund (IMF) to revive the program. in loans of $ 6 billion.

Pakistan would gain in forex liquidity, multilateral funding, the FATF, and political acceptance of financial discipline in the event the IMF lending facility resumes. Samiullah Tariq, head of research at Pak-Kuwait Investment Company, said inflation is expected to stay within the SBP-defined range of 7-9%.

“In my opinion, interest rates would rise an additional 25 basis points in the next monetary policy. A further increase would depend on the direction of world commodity prices, ”he added.

Likewise, Tahir Abbas, Head of Research at Arif Habib Limited, said: “Rising oil prices would have a negative impact on our balance of payments, as oil imports represent around 25% of our total imports. We expect inflation to remain at 9-9.25% during FY22. Regarding interest rates, our projection is 8.5% by the end of fiscal year 22. “

CPI inflation was 9.0% in September.

The SBP raised its key rate by 25 basis points to 7.25% last month.

“This robust recovery in domestic demand, coupled with rising international commodity prices, is leading to a strong recovery in imports and an increase in the current account deficit. While year-on-year inflation has declined since June, increasing demand pressures along with higher imported inflation may start to show up in the inflation figures later in the year, ”he said. the SBP said in the latest monetary policy release.

“Looking ahead, the outlook for inflation depends largely on developments in domestic demand and administered prices, including fuel and electricity, as well as global commodity prices. The MPC will continue to closely monitor developments affecting the medium-term outlook for inflation, financial stability and growth and stands ready to respond appropriately, ”he added.

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