S&P forecasts 450bps policy rate cut by year’s end

With an unexpected decline in monthly inflation below 12 per cent — the lowest in about 30 months — the S&P Global projected an immediate cut in the State Bank of Pakistan (SBP) policy rate by the end of the current month and a decline of cumulative 450 basis points by the end of 2024 from an existing peak of 22pc.

“The recent softening in headline inflation increases the likelihood of SBP lowering its policy rate in June 2024. Overall, S&P Global Market Intelligence projects a cumulative 450 basis point reduction in the policy rate by the end of 2024,” S&P Global Market Intelligence said on Monday in a brief note.

The next monetary policy committee meeting of the central bank is due on June 10.

The S&P noted that the realised headline Consumer Price Index (CPI) inflation of 11.8pc for May — down from a peak of 38pc in May last year — was considerably lower than the market expectations, mainly on the back of a notable deflation in food prices, led by perishables.

Projects immediate decline in SBP interest rate by end of current month

“Inflation is projected to continue its declining trend in the coming months, majorly owing to favourable base effects,” it said, adding that it would remain in the double-digit range, with an average monthly year-over-year inflation rate of 13.7pc for 2024.

It said the SBP had maintained its policy rate at 22pc in its April 29 meeting due to elevated inflation, heightened global financial market uncertainty, and the upcoming budget announcement in June, but the latest inflation numbers justified rate cuts from now on.

Besides the market expectations, the latest inflation number for May released by the Pakistan Bureau of Statistics (PBS) at 11.8pc was beyond the imagination of even the government. “Inflation is anticipated to remain within the range of 13.5-14.5pc for May 2024,” the Ministry of Finance had forecast last week in its monthly economic outlook.

Last week, the ministry forecast the prospects for a gradual easing in inflation, with expectations of a decrease to 12.5-13.5pc by June 2024. Both monthly estimates were surpassed by a significant margin. Interestingly, the Annual Plan Coordination Committee (APCC) last week set an annual CPI target of 12pc for the next fiscal year.

The finance ministry had attributed the downward inflation trajectory to a high base effect of last year and improvements in domestic supply chain of perishable items, staple food like wheat and reduction in transportation costs.

The government’s commitment to curbing inflation through stringent administrative measures paints a promising picture for the inflation outlook, it claimed. A key pillar in this strategy is the bolstered availability of food items, which is crucial for taming inflationary pressures.

The government claims credit for easing inflationary pressures, saying it stabilised prices by consistently managing supply and demand. In May, petroleum product prices dropped twice, positively impacting the CPI for the month. Besides, lower fuel prices reduced transportation costs, contributing to this favourable CPI trend.