Inflation in Pakistan hits nine and a half year low

The inflation rate in Pakistan in February reached a nine-and-a-half-year low, arriving at 1.5%, much below the market expectation of 2.2%. This drop was attributed to a sharp decline in some key food items and stability in the domestic currency.

The Pakistan Bureau of Statistics released the inflation numbers on Monday, indicating that the February inflation rate stood at 1.51%, compared to 23.06% in February 2024.

The inflation rate during the first eight months averaged 5.84%, compared to 27.95% during the same period in the previous year.

The State Bank of Pakistan (SBP) in its January monetary policy statement noted that the declining trend in inflation is mainly due to the downward adjustment in electricity tariffs, an adequate supply of key food items leading to low food inflation, stability in the exchange rate, and a favorable base effect.

Underlying inflationary pressures, as indicated by core inflation, also moderated amidst contained domestic demand, though they remain elevated. Moreover, inflation expectations have remained volatile.

Based on these trends, the monetary policy committee reiterated its earlier assessment that near-term inflation will remain volatile and is expected to increase close to the upper bound of the target range towards the end of FY25.

SBP expects inflation for FY25 to average between 5.5% and 7.5%.

Monetary Policy Outlook

Going forward, the inflation outlook is subject to risks from volatile global commodity prices, protectionist policies in major economies, the timing and magnitude of administered energy tariff adjustments, volatile perishable food prices, and any additional measures to meet the revenue target.

The drop in the inflation rate to more than a nine-year low have rekindled hopes that the interest rate might see a cut of 100 basis points, whereas earlier, there was consensus for a 50 basis points cut. Additionally, several analysts predicted that the central bank might maintain the status quo due to rising import numbers.

The current account in January turned into a deficit amounting to $480 million, whereas the seven-month figures scaled down to a $682 million surplus from a six-month level of a $1.2 billion surplus.

Still, the real interest rate remains positive and has now entered the double-digit column at 10.5%, up from 9.6% in January.