As rupee moves towards stability, experts believe inflation will soon fall to one digit
Saad Hashmi, Executive Director of the mentioned research house, is of the view that now the rupee-dollar exchange rate will now remain stable.
As stability returns to rupee-dollar parity since July, experts believe inflation will fall to single-digit after February 2020 as well. Inflation has peaked out at a startling level of 11.4% in September 2019, leaving many hopeless.
According to the projected low inflation reading in the coming month of the financial year 2019-20 (October to June), some experts foresee a ’50-basis-point cut in the benchmark interest rate to 12.75% in the next bi-monthly monetary policy statement, which will be announced in November. Currently, the policy-rate stands at 13.25,%, the highest in eight years.
The pressure to reduce the interest rate from the government’s and private sector’s side further supports the projection that the rate will be reduced at 50 basis points in the upcoming month.
BMA Research in one of the reports indicated that the Consumer Price Index (CPI) inflation was reported at a high 11.4% for the month of September.
“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 a single digit,” the report added.
Saad Hashmi, Executive Director of the mentioned research house, is of the view that the rupee-dollar exchange rate will now remain stable, which will provide the absolutely imperative boost needed for the inflation to reduce.
An improvement in Pakistan’s foreign currency reserves:
The improvement in Pakistan’s foreign currency reserves has further stability to the exchange rate during the ongoing financial year. Previously, the rupee has recovered 2.3% on July 1. It now stands at Rs156.36 against the US dollar. In the past, it depreciated 52% from December 2017 to Rs160.05 on 30th June 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 added.
“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.”
Reza Baqir, Governor State Bank, has recently said that he is now comfortable with the existing 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 added.
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