KARACHI: The steep fall estimated in the main inflation in May could pose a challenge for the State Bank of Pakistan (SBP) to maintain the record high 22 per cent interest rate.

The wide gap between inflation and interest rates has already disrupted the growth pattern, with liquidity flow for economic growth remaining negligible. In March, inflation stood at 17.3pc, and stakeholders were confident that the central bank would cut interest rates by at least 150 basis points.

However, when the SBP announced the monetary policy on April 29, it kept the interest rate unchanged. The trade and industry sectors demanded an emergency meeting of the SBP’s Monetary Policy Committee to lower the rate, which has already hampered economic growth.

“Inflation is expected to decrease significantly from 38pc in May 2023 to around 15pc in May 2024,” said Topline Securities CEO Mohammad Sohail.

Steep fall poses challenge to unprecedented 22pc policy rate

The entire financial markets, along with the equity market, were flooded with this estimated 15pc CPI for May.

Researchers and analysts found the situation conducive to an interest rate cut, foreseeing a possible early meeting of the SBP.

However, Finance Minister Mohammad Aurangzeb recently reiterated that the interest rate would be reduced due to the decline in inflation, possibly in June or July.

“Although inflation is still higher than Pakistan’s historical average of 11pc, this downward trend is a positive sign and will help restore confidence,” Mr Sohail said.

“Based on the two weeks’ data, we anticipate inflation to decrease to 13pc in May 2024,” said FRIM Ventures.

According to the latest report from the Pakistan Bureau of Statistics, the Sensitive Price Index (SPI) has decreased by 1.39pc on a week-on-week basis, marking the fourth consecutive weekly decline and the most significant drop seen in the past 28 weeks, according to a report by FRIM Ventures.

Researchers and analysts were confident about the significant decline in the main inflation, but their estimates varied.

The head of research and development at Pak-Kuwait Investment Limited, Samiullah Tariq, said May inflation would be around 14pc.

May’s inflation appears to be in the range of 13pc to 15pc, creating a substantial gap between it and the 22pc interest rate.

“The inflation has provided enough room for the SBP for a big interest rate cut, the only way to stimulate the economy, which is expected to expand around 2pc in FY24 after negative growth last year,” said an analyst.

The high interest rates have also burdened the government with costly borrowing, halted domestic investments, and increased unemployment.

The government paid Rs5.517 trillion as markup during the first nine months of the current fiscal year FY24, reflecting a high negative impact on government revenue. The markup consumed 76pc of the tax revenue in nine months of FY24.

Published in Dawn, May 11th, 2024