SITREP | South Asian Inflationary Pressures Are Fading

By World Bank Helped by easing pressures on commodity prices, tight monetary policy stances, and relatively stable currencies, South A...

By World Bank

Helped by easing pressures on commodity prices, tight monetary policy stances, and relatively stable currencies, South Asia ceded its long-held top spot as the region with the highest inflation rate. The Consumer Price Index (CPI) increased by 3.2 percent year-on-year in February 2015, below its regional counterparts for Latin America and Caribbean and for Sub Saharan Africa, at 3.5 and 3.8 percent respectively. 

Image Attribute: Vegetable stall, Pushkar, Rajasthan State, India / CC

March 2015 saw a further pronounced decrease for South Asia. Besides commodity prices, another crucial component of consumer prices in South Asia, food price inflation, has also contributed to the decrease in CPI inflation, except for an up-tick in India since the start of 2015. The drop in food price inflation is partly attributable to robust food harvests across the region.

Chart Attribute:  All countries in South Asia experienced a Deceleration in Inflation

Inflationary pressures have consistently eased across all South Asian economies. In Afghanistan, consumer price inflation dropped from 7.7 percent in 2013 to 4.4 percent in 2014 as both food and non-food price increases slowed down. Bangladesh’s inflation appears contained showing decreasing momentum with the twelve-month moving average decelerating to 6.8 percent in February 2015, compared with 7.6 percent in February 2014. Headline inflation (year-on-year) declined to 6.1 percent in February 2015, compared with 7.4 percent in February 2014. Given their currency peg to the Indian rupee, both Bhutan and Nepal both saw consumer price inflation slowing down in line with trends in India. There, inflation declined to 5.1 percent (or to 4.3 according to the new CPI series) during October 2014-January 2015, from an average 7.7 percent (or 7.3 percent according to the new CPI series) in FY2014/15H1. 

Chart Attribute: Monetary policy has recently started to soften in Pakistan and India

Similarly, in Pakistan inflation rates reached a 13-year low of 2.5 percent at the end of March 2015, down from a peak of 10.9 percent in November 2013. In Maldives, inflation is forecasted to be just 0.3 percent in 2015 but to pick up with the increase in import duties, to settle at around 4 percent in the medium term. Last but not least, Sri Lanka saw its annual average inflation, as measured by the Colombo Consumer Price index (CCPI‐2006/07), decline for 19 consecutive months. On a year-on-year basis, inflation hit its lowest point in March 2015, at just 0.1 percent.

The deceleration of inflation has already triggered monetary policy responses. Lower inflation rates and well-anchored inflationary expectations led the Reserve Bank of India (RBI) and the State Bank of Pakistan (SBP) to lower their interest rates in a move to support credit growth. RBI has adopted a framework based to on flexible inflation target, and the recent decline in inflation and fiscal restraint generated some room for monetary accommodation, making it possible to lower the policy rate twice in the recent past (while keeping it constant at the latest meeting). The SBP lowered the policy rate (called SBP reverse repo rate) from 10 percent to 9.5 percent on November 17th 2014 and further to 8.5 percent on January 26th 2015. It further lowered the rate by another 50 basis points on March 24th 2015.

Note: Inflationary pressures refers to the demand and supply-side pressures that can cause a rise in the general price level. Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap.

Source: Making the Most Cheap Oil by The World Bank