Will SBP Reduce Interest Rates After Inflation Keeps Falling?

Islamabad: Pakistan's headline inflation rate dropped for the fifth month in a row to 11.8% in May, leading to expectations that the State Bank of Pakistan (SBP) might lower its policy rate, as reported by S&P Global Market Intelligence.

This analysis by S&P Global Market Intelligence outlines important trends and forecasts. The Consumer Price Index (CPI) inflation rate of 11.8% in May was much lower than expected, mainly due to a significant drop in food prices, especially perishable items.

Inflation is expected to keep falling in the coming months, thanks to favorable base effects.

Despite this decline, inflation is predicted to stay in double digits, with an average monthly year-over-year inflation rate of 13.7% forecasted for 2024 by S&P Global Market Intelligence.

In light of the current economic conditions, including high inflation, global financial market uncertainties, and the upcoming budget announcement in June, the SBP kept its policy rate at 22% during its meeting on April 29.

However, the recent drop in headline inflation makes it more likely that the SBP will lower its policy rate in June 2024.

Overall, S&P Global Market Intelligence expects a total reduction of 450 basis points in the policy rate by the end of 2024.