![Pakistan's inflation rate to drop further in upcoming weeks](https://trending-pakistan.com/wp-content/uploads/2023/06/economy-red-1000x550.jpeg)
According to a recent report by Arif Habib Ltd (AHL), inflation is expected to decrease in the coming months, reaching an average of 0.99 percent month-on-month by December 2023. The report suggests that inflation will hover between 23-29 percent between June and December, primarily due to high base effects. Additionally, the report predicts that real interest rates will turn positive in the second half of FY24, with a potential reduction of 400-500 basis points in the policy rate.
The report attributes the high headline inflation of 38 percent to factors such as last year’s floods, higher taxes, the removal of subsidies, and exchange rate depreciation. However, it states that further increasing interest rates will not be beneficial and calls for a holistic approach to address the underlying fundamentals.
The Monetary Policy Committee (MPC) is scheduled to meet on June 12th to determine the future economic direction of the country. The report advises against further policy rate increases, highlighting the negative impact of monetary tightening on the economy. The survey conducted by AHL among various sectors indicates that 77.3 percent of respondents expect the policy rate to remain unchanged at 21.0 percent, while 22.7 percent anticipate a 100 basis points increase.
Regarding the fiscal situation, the report reveals that approximately 84 percent of deposits in domestic banks have been extended to the government. The servicing of domestic debt has risen by 69 percent, reaching 3.6 trillion by March 2023, primarily due to the significant increase in the policy rate. The report cautions against further interest rate hikes as it would exacerbate the existing economic challenges.
The report also mentions that investors are adopting a “wait and see” approach, as the primary yield market has remained relatively stable since the April 2023 monetary policy. Yield curve inversion has been observed, with long-term bond yields falling below those of shorter-term bonds. This suggests that stakeholders anticipate uncertain economic scenarios despite the expected policy rate cuts.