As to the study released on Tuesday by brokerage company Ismail Iqbal Securities, Pakistan’s annual inflation rate is anticipated to decrease to 13.1% in May 2024 from 17.3% in April 2024.
The paper states that after declining by 0.43 percent in April 2024, inflation is predicted to decline by 2.1 percent on a month-over-month (MoM) basis. The decrease on a month-over-month basis is mostly the result of a decrease in food inflation, which was 5.6% (with a significant drop in the cost of fresh fruits, wheat, chicken, onions, and tomatoes), a downward FCA adjustment of 1.8%, and a high base effect.
The report also stated that real interest rates are predicted to hit 8.9 percent, which would be the highest in the previous 20 years. The highest rate that was previously recorded was 5.4% in April 2015.
The State Bank of Pakistan (SBP) adopted a cautious tone during the most recent Monetary Policy Committee (MPC) meeting, according to the report. They stressed that in order to determine how the budget and the IMF programme will affect inflation, their effects must be evaluated.
According to the brokerage house, there will be opportunity for a rate drop at the next MPC meeting because of the wide difference between the policy rate and the CPI. It further stated that the sharp drop in inflation, which was mostly caused by a drop in food prices, was not expected at the start of the year.
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The reduction in inflation may impact Pakistan’s economy in a number of ways:
- Purchasing Capacity:
Consumers’ purchasing power rises when inflation declines. People may purchase more goods and services with their income when prices rise more slowly.
- Rates of Interest:
The central bank frequently modifies interest rates in response to patterns in inflation. The central bank might think about cutting interest rates in response to a decline in inflation. Reduced interest rates may encourage borrowing and investment, which could accelerate economic expansion.
- Costs of Business:
Less inflation lowers business costs because it lowers production costs. Companies can sustain profitability and make expansionary investments when input prices (such as raw materials) rise more slowly.
- Investor Self-Assurance:
A stable or decreasing rate of inflation encourages investor confidence. A nation that enjoys stable price levels is more likely to attract capital inflows and economic stability from its investors.
- Rates of Exchange:
Exchange rates are affected by inflation. Reduced inflation could make imports more affordable and exports more competitive by strengthening the local currency against other currencies.
- Debt Control:
Debt gradually loses value due to high inflation. Lower inflation makes it easier for the government and individual borrowers to handle their debt loads.
When evaluating the whole influence on the economy, it is crucial to take other aspects such as structural reforms, external shocks, and fiscal policies into account.