ISLAMABAD:
In October, food prices pushed Pakistan’s annual inflation rate up to 7.2%. However, underlying inflationary pressures have continued to ease, opening the door for a significant interest rate cut at the policy meeting on Monday.
The annual and monthly inflation readings have both increased, with the exception of the core inflation rate, which has decreased as a sign of easing underlying pressures.
The Pakistan Bureau of Statistics (PBS) reported on Friday that inflation increased slightly in October, reaching 7.2% compared to the previous year. Both market expectations and the Ministry of Finance’s anticipated range of 6% to 7% for November were met by this reading.
The State Bank of Pakistan (SBP) will hold its next Monetary Policy Committee meeting on Monday to decide on the interest rate, which has been reduced from 22 percent to 17.5 percent in recent months. But the rate is still a lot higher than the current inflation rate.
“There is no reason for keeping the interest rates at 17.5% when inflation is at 6.9%,” said Deputy Prime Minister Ishaq Dar this week. He also said that even a big cut in interest rates could still give a cushion against inflationary expectations.
Even though the central bank makes the decision, Finance Minister Muhammad Aurangzeb has previously cautioned against an environment with high interest rates.
On Monday, market analysts anticipate a rate cut of at least 2%, though some speculate that a steeper cut may be possible.
Dar additionally communicated that the rupee, right now at Rs278 to the dollar, is underestimated, proposing it ought to be nearer to Rs240, as the high dollar rate doesn’t reflect financial essentials. He argued that high interest rates put a strain on fiscal resources and contribute to inflation from this overvaluation.
The central bank regularly purchases foreign currency to increase reserves, resulting in subdued demand for the dollar.
The government has set an inflation target of 12% for the current fiscal year, and the International Monetary Fund (IMF) predicts that it will reach 9.5% by the end of the year. In contrast, monthly inflation rose by 1.2 percent.
In urban areas, core inflation, which excludes energy and food prices, further slowed to 8.6%, indicating a relief from underlying inflationary pressures. In rural areas, however, core inflation slowed to 11.7%. As a result, average core inflation is now nearly 8% lower than the policy rate.
According to PBS data, rural inflation increased to 4.2% last month while urban inflation remained stable at 9.3%. Urban food prices increased by 2.7%, while rural food prices increased by 0.6%, according to the data.
Last month, sharp price increases in onions, fresh vegetables, and fruits contributed to the 16% annual increase in perishable food prices. However, non-food inflation decreased as a result of a 34% drop in the price of wheat and wheat flour.
However, gas prices remained high, up 319 percent from the previous year, and vehicle taxes increased by 169 percent.
The official annual target of 12% was well below the average inflation rate for the first four months (July-October), which fell into the single digits at 8.7%. However, the average rate of inflation in urban areas remains high at 10.8%.
The public benefits from the slowing of inflation in some ways, but the Federal Board of Revenue (FBR) is concerned about it. Slowing inflation, sluggish growth in large industries, and single-digit import growth are the causes of the FBR’s revenue shortfall. However, the FBR has not provided an explanation for its inability to effectively target traders or address enforcement gaps.
