Inflation Fluctuations in Pakistan

Desk

132

Editorial

The recent deceleration in the Consumer Price Index (CPI)-based inflation may prompt the State Bank of Pakistan (SBP) to consider a significant reduction of 150 basis points (bps) in the policy rate during the upcoming Monetary Policy Committee (MPC) meeting.

Despite the absence of an official schedule for the MPC meetings from the SBP, the trend of declining inflation is expected to persist. The July 2024 CPI is projected to decrease to 10.5%, maintaining Pakistan’s real interest rate (RIR) at a significantly high 10 percentage points, as outlined in a report by JS Global.

The report also highlights the sustained softening of inflation, emphasizing that the easing cycle should continue at the upcoming July meeting of the MPC, with an expected 1.5% cut. This is following the recent 1.5% reduction in the policy rate in June 2024, marking the first cut in four years.

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The MPC’s decision to reduce the key policy rate was supported by the decline in inflation and the moderation in core inflation, along with easing inflation expectations from consumers and businesses. The committee also acknowledged certain upside risks associated with budgetary measures and uncertainties regarding future energy price adjustments. Despite these risks, the cumulative impact of earlier monetary tightening is expected to mitigate inflationary pressures.

Additionally, the ‘Pakistan Country Risk Report’ by BMI, a Fitch Solutions Company, published on July 15, supports the expectation of a key policy rate cut at the next MPC meeting. BMI projects that the SBP may reduce the key policy rate to 16% by the end of 2024 and further decrease it to 14% by the end of 2025.

Overall, the potential slowdown in CPI-based inflation and the ongoing easing measures by the SBP indicate a favorable outlook for monetary policy. This suggests a proactive approach by the SBP in managing inflation and fostering economic stability, which is crucial for the country’s economic health.