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S&P Predicts 450bps Policy Rate Cut by Year-End

With a surprising drop in monthly inflation to below 12 percent, the lowest in nearly 30 months, S&P Global predicts an imminent reduction in the State Bank of Pakistan (SBP) policy rate by the end of this month. A cumulative decline of 450 basis points is expected by the end of 2024 from the current peak of 22 percent.

“The recent easing in headline inflation makes it likely that the SBP will lower its policy rate in June 2024,” stated S&P Global Market Intelligence on Monday. “We project a cumulative 450 basis point reduction by the end of 2024.”

The central bank’s next monetary policy committee meeting is scheduled for June 10. S&P highlighted that the May Consumer Price Index (CPI) inflation of 11.8 percent—down from a peak of 38 percent in May last year—was significantly lower than market expectations. This decline was primarily driven by notable deflation in food prices, especially perishables.

S&P anticipates an immediate reduction in the SBP interest rate by the end of this month. “Inflation is expected to continue its downward trend in the coming months, largely due to favorable base effects,” the report stated, noting that it would remain in the double-digit range, with an average monthly year-over-year inflation rate of 13.7 percent for 2024.

In its April 29 meeting, the SBP kept the policy rate at 22 percent due to elevated inflation, global financial market uncertainty, and the upcoming budget announcement in June. However, the latest inflation figures support the case for rate cuts moving forward.

The May inflation figure released by the Pakistan Bureau of Statistics (PBS) at 11.8 percent was surprisingly low, even beyond government expectations. The Ministry of Finance had forecast inflation to be between 13.5-14.5 percent for May 2024. Last week, the ministry predicted a gradual decline in inflation, expecting it to decrease to 12.5-13.5 percent by June 2024. These estimates were significantly surpassed.

Interestingly, the Annual Plan Coordination Committee (APCC) set a target of 12 percent CPI for the next fiscal year. The finance ministry attributed the downward trend to a high base effect from the previous year and improvements in the domestic supply chain of perishable items, staple foods like wheat, and reduced transportation costs.

The government’s commitment to controlling inflation through stringent administrative measures appears promising. A crucial element in this strategy is the improved availability of food items, essential for managing inflationary pressures.

The government credits its consistent supply and demand management for stabilizing prices. In May, petroleum product prices dropped twice, positively impacting the CPI. Additionally, lower fuel prices reduced transportation costs, contributing to the favorable CPI trend.

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