Inflationary pressure in Pakistan is anticipated to ease further, with inflation potentially dropping to single digits starting from August 2024, according to a report by JS Global released on Thursday. The brokerage house projects that the Consumer Price Index (CPI) will record a 9.3% year-on-year increase in August, marking the first time in three years that inflation has fallen to single digits.
JS Global’s report highlights that while food prices, which constitute 35% of the CPI basket, are expected to continue rising, these increases are likely to be offset by a decline in energy prices. This trend is expected to bring overall inflation down, continuing the downward trajectory observed in recent months.
Inflation has been a persistent challenge for Pakistan’s economy, with the CPI inflation rate peaking at a record high of 38% in May of the previous year. Since then, inflation has gradually decreased, with July 2024 recording a year-on-year inflation rate of 11.1%, down from 12.6% in June. This was the lowest inflation rate since November 2021, when it stood at 11.5%, according to data from the Pakistan Bureau of Statistics (PBS).
The report further suggests that the expected inflation figure for August could push real interest rates (RIR) above 10 percentage points, a level last seen in May 2024. If the inflation rate continues to decline, with the September reading potentially falling below 8.5%, the RIR could expand to nearly 11 percentage points—a level not seen since the mid-1990s.
This decline in inflation may support the Monetary Policy Committee’s case for continuing its monetary easing cycle in September, with expectations of a third consecutive interest rate cut. The brokerage house anticipates a potential 150 basis point reduction, which would bring the policy rate down to 18%. It’s noteworthy that shorter-term secondary market yields are currently trading about 200 basis points below the policy rate.
In July, the State Bank of Pakistan (SBP) reduced the key policy rate by 100 basis points, bringing it to 19.5%. The central bank cited risks to the inflation outlook from fiscal slippages and ad-hoc decisions related to energy price adjustments as reasons for its cautious approach to monetary easing.