ISLAMABAD: The federal government has revised its inflation forecast for August to a single digit, setting the stage for potential reductions in the interest rate by the central bank during the upcoming monetary policy meeting. The Finance Ministry, in its monthly economic outlook released on Friday, projected inflation to hover between 9.5% and 10.5% in August, a notable improvement from the previous estimate of 11%.
This downward adjustment signals a continuation of economic stabilization, with expectations that inflation will further decrease to a range of 9% to 10% in September. The revised outlook is likely to intensify pressure on the State Bank of Pakistan (SBP) to adopt a more aggressive stance in lowering the policy rate, which currently stands at 19.5%. The next monetary policy committee meeting, scheduled for September 12, will be closely watched for any significant rate cuts that could spur economic growth.
Finance Minister Muhammad Aurangzeb and military leaders have expressed concerns over the SBP’s cautious approach to monetary easing, which they believe is stifling economic recovery and straining fiscal accounts. The government has earmarked Rs9.8 trillion for interest payments in the current fiscal year, assuming an average interest rate of 18%. However, SBP Governor Jameel Ahmad argued that the net interest cost should be considered after factoring in the central bank’s projected profit of Rs2.5 trillion, which will be returned to the federal government.
The Finance Ministry’s report highlights that easing monetary policy is being driven by lower inflationary pressures, with the money supply (M2) contracting by 3.2% in the first month of FY25—a sharper decline than in the previous year. This trend, combined with a reduction in consumer price index (CPI) inflation in July, supports the ministry’s optimism that single-digit inflation could be sustained in the coming months.
Despite the recent uptick in inflation due to budgetary measures, which pushed prices of essential goods higher, the Finance Ministry remains confident in the economy’s positive momentum. Large-scale manufacturing is expected to maintain its growth, supported by stable external demand, a firm exchange rate, and the easing of inflation. However, the ministry cautioned that the agricultural sector’s performance for the Kharif 2024 season would depend heavily on weather conditions, with recent rains having the potential to either bolster or damage crop yields.
On the external front, the report notes that exports, imports, and workers’ remittances are showing an upward trend. Projections for August 2024 place exports between $2.5 billion and $3.2 billion, imports between $4.5 billion and $5 billion, and remittances in the range of $2.6 billion to $3.3 billion.
As the economic indicators continue to stabilize, all eyes are on the central bank’s next move, which could play a pivotal role in shaping Pakistan’s economic trajectory in the coming months.
