August 13, 2020: A sharp spike in food prices may snap the Pakistan central bank’s longest policy easing streak in nearly two decades, say some economists.
Headline inflation accelerated to 9.3% in July — above the State Bank of Pakistan’s 7%-9% range forecast for this year — fuelled by a 17.8% increase in food prices. The South Asian nation resorted to importing of staples such as wheat and sugar after their costs increased.
“It’s a combination of supply shortage and hoarding by the middlemen that has resulted in this disruption,” said Suleman Maniya, head of the advisory at Karachi-based Vector Securities Pvt. “Pakistan is facing serious issues in its food security regime that includes availability at affordable prices. If the government can’t keep this under control, they will see protests.”
It isn’t just wheat and sugar, but the cost of vegetables such as tomato has also surged. With food and beverage items making up a third of the consumer price basket, the price increase has prompted some economists to revise their interest-rate forecast.
Pearl Securities Ltd., which as of last month had penciled in one more rate cut, doesn’t expect any further easing for now. The central bank cut interest rates by a cumulative 625 basis points in five back-to-back moves this year — the most easing in a row since at least 2003 — as inflation dropped from a high of 14.6% in January to 8.2% in May.
However, inflation quickened as a result of a rally in food prices due to reasons including locust attacks on crops, and smuggling and hoarding amid a nationwide lockdown to contain the coronavirus pandemic. “Inflation is expected to stay a bit high,” said Yawar Uz Zaman, head of research at Pearl, which this month revised its average inflation estimate to 7% from 5.5%-6% this month.