ISLAMABAD: A report from Topline Securities suggests that the slowing inflationary trend in Pakistan is expected to continue in October 2024, though a slight monthly increase is anticipated. The Consumer Price Index (CPI) for October is projected to range between 6.5% and 7.0% year-on-year, with a monthly increase of approximately 0.9%. This would bring the average inflation for the first four months of FY25 to around 8.6%, a significant decrease from the 28.5% recorded during the same period last year.
Recent Inflation Trends
Inflation has been a persistent challenge for Pakistan, peaking at a record high of 38% in May 2023. However, the CPI has been on a downward trend since then, with the latest data from the Pakistan Bureau of Statistics (PBS) showing a year-on-year inflation rate of 6.9% for September 2024, down from 9.6% in August. This marks the lowest inflation rate since January 2021.
Impact on Real Interest Rates and Policy Outlook
Topline Securities notes that the expected inflation rate of around 6.5-7.0% for October will result in real interest rates rising to between 1050 and 1100 basis points (bps), significantly above Pakistan’s historical average of 200-300 bps. This increase in real rates may prompt further reductions in the key policy rate.
In its last meeting, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) implemented a substantial cut of 200 bps to reduce the policy rate to 17.5%, citing slowing inflation and decreasing international oil prices. The next monetary policy meeting is scheduled for November 4, 2024, where a fourth consecutive cut of 200 bps is anticipated, potentially bringing the total reduction to 650 bps over the past few months.
Future Projections
Topline Securities forecasts that the policy rate may fall to between 13% and 14% by June 2025. The SBP has indicated that average inflation for FY25 is likely to be lower than the previously estimated range of 11.5% to 13.5%. However, any significant changes in commodity prices, particularly oil prices (currently projected at $75 per barrel), could affect these inflation estimates.
