450bps Policy Rate Cut Predicted by S&P by Year's End
Saad khan 
Islamabad: With an unexpected drop in monthly inflation to below 12 percent, the lowest in 30 months, S&P Global projects an immediate cut in the State Bank of Pakistan's policy rate by month's end and a total reduction of 450 basis points by the end of 2024 from the current peak of 22 percent.
The recent softening in headline inflation increases the likelihood of the 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, according to a brief note released on Monday.
The next monetary policy committee meeting of the central bank is scheduled for June 10.
S&P noted that the realized headline Consumer Price Index (CPI) inflation of 11.8 percent for May—down from a peak of 38 percent in May last year—was significantly lower than market expectations, primarily due to a notable deflation in food prices, especially perishables.
S&P also projects an immediate decline in the SBP interest rate by the end of the current month.
"Inflation is projected to continue its declining trend in the coming months, mainly due to favorable base effects," it said, adding that it would remain in the double-digit range, with an average monthly year-over-year inflation rate of 13.7 percent for 2024.
The SBP had maintained its policy rate at 22 percent in its April 29 meeting due to elevated inflation, heightened global financial market uncertainty, and the upcoming budget announcement in June. However, the latest inflation numbers justify rate cuts moving forward.
The Pakistan Bureau of Statistics (PBS) reported that the latest inflation number for May, at 11.8 percent, exceeded even the government's expectations. The Ministry of Finance had forecast inflation to be within the range of 13.5–14.5 percent for May 2024 in its monthly economic outlook.
Last week, the Ministry of Finance predicted a gradual easing in inflation, expecting a decrease to 12.5–13.5 percent by June 2024. Both monthly estimates were surpassed by a significant margin. Additionally, the Annual Plan Coordination Committee (APCC) set an annual CPI target of 12 percent for the next fiscal year.
The finance ministry attributed the downward inflation trend to a high base effect from last year and improvements in the domestic supply chain of perishable items, staple foods like wheat, and reduced transportation costs.
The government claims credit for easing inflationary pressures, stating it stabilized prices by consistently managing supply and demand. In May, petroleum product prices dropped twice, positively impacting the CPI for the month. Additionally, lower fuel prices reduced transportation costs, contributing to this favorable CPI trend.
