The latest data from the Pakistan Bureau of Statistics reveals a notable decline in the monthly inflation rate for February 2024, marking a 20-month low since July 2022. Talking to WealthPK, Dr Durr-i-Nayab, an economic researcher at the Pakistan Institute of Development Economics, however, questioned the sustainability of this downward trend in inflation even as the government strives to meet its inflation targets for the ongoing fiscal year 2023-24. She added that a decisive decline in inflation on a 12-month forward-looking basis was primarily attributed to the base effect. The February 2024 inflation rate stands at 23%, signalling a crucial shift. While the month-on-month increase hovers at a mere 0.03% from January 2024, concerns emerge about the government being able to meet its target of 21% by the close of FY24. Even if the current rate persists until June, the 12-month average inflation is projected to exceed the target by three percentage points. A closer look at the data reveals that the recent reduction in inflation is largely attributed to the Consumer Price Index-based food basket, which has significantly dropped from over 55% to 31% of the monthly inflation.

This decrease translates to an 11-percentage point reduction in the National Consumer Price Index (N-CPI), accounting for 73% of the overall decline from its peak in May 2023. In contrast, non-food CPI remains stubbornly high at 28.2% as of February 2023, contributing 16 percentage points to the N-CPI reading of 23%. With impending energy tariff revisions on the horizon, there is uncertainty regarding a substantial easing of non-food CPI in the coming months. Talking to WealthPK, Dr Rafiullah Kakar, a member of the development project committee at the Planning Commission, said that despite the potential for a substantial slowdown in inflation due to the base effect, questions arise about justifying a reduction in the discount rate. Advocates of cost-push inflation argue that if monetary policy did not contribute to historic food inflation, a slowdown in food inflation should not be the sole reason for a rate cut. Moreover, core inflation has not trended downward long enough to conclusively demonstrate a subsiding of demand-side inflationary pressures. The relative stability in the exchange rate since October 2023 is identified as a key factor in controlling food inflation.

However, concerns about an overvalued currency and potential future pressures raise doubts about the prudence of lowering interest rates based on forward-looking forecasts. Rafiullah Kakar emphasised that maintaining the current discount rate while inflation gradually tapers could prevent the early onset of currency depreciation, preserving positive real rates and alleviating downward pressure on the currency. “Rushing to reduce interest rates may prematurely signal the start of the next growth cycle, with lingering fiscal challenges and delayed structural reforms, especially in the energy sector.” Drawing a contrast with developed markets, where central banks adhere resolutely to inflation targets, the State Bank of Pakistan has faced challenges meeting its targets for the past six years or longer, he pointed out. He said the central bank’s Monetary Policy Committee must navigate this delicate balance, ensuring a measured approach to prevent a premature contraction and considering the long-term consequences.

Credit: Independent News Pakistan (INP)