Experts believe inflation will fall to single digit

Also foresee 50bps cut in benchmark interest rate in next monetary policy

KARACHI: Economic experts strongly believe that the pace of inflation has peaked out at 11.4% in September 2019 and it will start decelerating to single digit after February 2020 as stability has returned to the rupee-dollar parity since July this year.

Based on the projected low inflation reading in remaining months (October-June) of the current fiscal year 2019-20, a section of experts has foreseen a 50-basis-point cut in the benchmark interest rate to 12.75% in the next bi-monthly monetary policy statement to be announced in November. The policy rate currently stands at an eight-year high at 13.25%.

The pressure to cut the interest rate from the government and the private sector has strengthened the projection for a rate reduction of 50 basis points next month.

The business community - feeling the heat from the high interest rate - met Army Chief General Qamar Javed Bajwa on Wednesday to apprise him of the tough conditions they were facing, said an expert who spoke on condition of anonymity.

BMA Research, in a report, pointed out that the Consumer Price Index (CPI) inflation was reported at 11.4% for September 2019. “As per our estimate, this is the peak inflation level for the current fiscal year. Inflation…is now expected to remain in double digits till February 2020 after which we expect it to fall to single digit.”

Executive Director of the research house Saad Hashmi said the rupee-dollar exchange rate would largely remain stable and provide much-needed support for deceleration in the pace of inflation.

Some improvement in the country’s foreign currency reserves has brought stability to the exchange rate during the current fiscal year. The rupee has recovered 2.3% since July 1 to Rs156.36 against the US dollar. Earlier, it depreciated 52% since December 2017 to Rs160.05 to the greenback on June 30, 2019.

“Our research house expects average inflation within a range of 10-10.25% for the full fiscal year 2020 after the government changed the base year to 2015-16 from 2007-08.

“This (10-10.25% expected inflation) is significantly lower than our previous expectation of 11.50% on the old base. This takes real interest rate (the benchmark interest rate minus inflation) to around 3% given the current SBP policy rate of 13.25%,” he said.

“It is interesting to note that the real interest rate for the last three years has averaged around 2%,” he pointed out, adding that the increase in the real interest rate provided the ground for a reduction in the benchmark policy rate.

State Bank of Pakistan (SBP) Governor Reza Baqir said in a recent analysts briefing that he felt comfortable at the current real interest rate spread of 2% based on the policy rate of 13.25% and the SBP’s average inflation expectation of 11-12% for FY20, he recalled.

“SBP’s forecast for full year inflation at 11-12% is based on the old base year. It will also revise down its projection under the new base year in one of its next reports,” he said.

Baqir has also stated that interest rate changes in future will primarily depend on the inflation trajectory, “which is now showing strong signs of peaking and is expected to eventually fall in the next few quarters.”

Arif Habib Limited Head of Research Samiullah Tariq cautiously agreed that the inflation had peaked out. He, however, disagreed with the point that the monetary policy committee of the State Bank would consider cutting the benchmark interest rate next month.

“It is too early to anticipate a cut in the interest rate, as we are yet to see inflation reading for October before the monetary policy is announced in November,” he pointed out. “The rate of inflation for September came in 25-30-basis-point higher than the street consensus.”

International petroleum oil prices still pose a challenge as any upward march in the market would negatively impact the domestic economy. Pakistan meets some 70-80% of its energy (oil and gas) requirements through imports.

Besides, a reduction in the interest rate would discourage foreigners from prolonging their investment in domestic sovereign debt schemes, he said. The county is projected to attract foreign investment to the tune of $2-3 billion in debt instruments (mainly treasury bills), which would ultimately help strengthen the country’s foreign currency reserves.

“The rate cut does not suit Pakistan at this point in time,” he said. “The monetary policy committee is expected to make the first cut in the policy rate in March as it may wait for a longer period to see a significant improvement in the inflation reading.”

Published in The Express Tribune, October 4^th, 2019.

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