The Pakistan Bureau of Statistics (PBS) has announced that inflation during December 2024 decline to 4.1%, slightly lower than market expectations, paving the way forward for a further cut in the cental bank’s interest rate.
According to analysts, the decline in the inflation rate is largely owed to a high base effect from the back-breaking inflation of last year. Additionally, food inflation declined to 0.3% year on year in December after hitting hyperinflationary levels last year.
In a report, brokerage firm JS Global has forecast inflation for fiscal year 2024-25 to average out around 6.5%, factoring in an anticipated rebound in the second half of the year. It said that this forecast did not expect any further hikes to the petroleum development levy, which would raise fuel prices and trigger further inflation.
Muhammad Tahir, a research analyst at Sherman Securities, said the food index had remained flat on monthly basis in December primarily due to a decline in prices of potatoes, fresh fruits, vegetables, ghee and cooking oil. He noted the housing index had decreased marginally by 0.8% month-on-month, attributed to a decline in electricity rates.
Urban core inflation declined to 8.1% year-on-year as compared to 8.9% in November, while rural core inflation slid to 10.7% year-on-year against 10.9% a month prior. “We expect the CPI to remain in single digit on monthly basis with expected average of 6.2% in FY25,” added Tahir.
The State Bank of Pakistan (SBP) slashed the policy rate by 900 basis points in 2024, going from 22% to 13%, the largest drop in the country’s history. The cuts were made after five consecutive meetings of the Monetary Policy Committee. The current interest rate, 13%, is the lowest since May 2022, when the policy rate stood at 13.75%.
The central bank has previously stated it seeks to maintain a cushion of 200-300 basis points between the inflation rate and the interest rate. With average inflation forecast at roughly 6 percent, that leaves anticipate real interest rates around 8-9%. As such, brokerage houses believe that the Monetary Policy Committee has sufficient space to implement a cut of another 200 basis point in its upcoming meetings in January and March 2025.