With an unexpected decline in monthly inflation to below 12 percent — the lowest in about 30 months — S&P Global has projected an immediate cut in the State Bank of Pakistan (SBP) policy rate by the end of this month, with a cumulative reduction of 450 basis points by the end of 2024 from the current peak of 22 percent.
“The recent easing of headline inflation increases the likelihood of the SBP lowering its policy rate in June 2024. Overall, S&P Global Market Intelligence forecasts a cumulative 450 basis point reduction in the policy rate by the end of 2024,” stated S&P Global Market Intelligence in a brief note on Monday.
The central bank’s next monetary policy committee meeting is scheduled for June 10.
S&P noted that the recorded headline Consumer Price Index (CPI) inflation of 11.8 percent for May — down from a peak of 38 percent in May of the previous year — was significantly lower than market expectations, primarily due to notable deflation in food prices, especially perishables.
S&P Global projects an immediate decline in the SBP interest rate by the end of this month.
“Inflation is expected to continue its downward trend in the coming months, mainly due to favorable base effects,” it added, predicting it would remain in the double-digit range, with an average monthly year-over-year inflation rate of 13.7 percent for 2024.
The SBP had maintained its policy rate at 22 percent in its April 29 meeting due to elevated inflation, global financial market uncertainties, and the upcoming budget announcement in June, but the latest inflation figures now justify rate cuts.
The latest inflation figure for May, reported by the Pakistan Bureau of Statistics (PBS) at 11.8 percent, was beyond even the government’s expectations. The Ministry of Finance had forecast inflation to be within the range of 13.5-14.5 percent for May 2024 in its monthly economic outlook last week.
Last week, the ministry predicted a gradual easing of inflation, expecting it to decrease to 12.5-13.5 percent by June 2024. These estimates were significantly surpassed. The Annual Plan Coordination Committee (APCC) recently set an annual CPI target of 12 percent for the next fiscal year.
The finance ministry attributed the downward inflation trend to a high base effect from last year and improvements in the domestic supply chain of perishable items, staple foods like wheat, and reduced transportation costs.
The government’s commitment to curbing inflation through stringent administrative measures presents a promising outlook, it claimed. A key aspect of this strategy is the increased availability of food items, which is crucial for controlling inflationary pressures.
The government credits itself for easing inflationary pressures, stating it stabilized prices by effectively managing supply and demand. In May, petroleum product prices were reduced twice, positively impacting the CPI for the month. Additionally, lower fuel prices reduced transportation costs, contributing to this favorable CPI trend.
