Further policy rate hikes likely in Pakistan over coming months: Fitch

With inflation set to remain well above the SBP’s target range, the ratings agency thinks that the tightening cycle still has some way to go.

The lagged impact of monetary and fiscal tightening will eventually reduce demand-side price pressure. Nevertheless, it will take some time before inflation drops back below the 7 per cent ceiling of the SBP’s target range, especially given the lingering effects of supply disruptions caused by the recent floods in the country.

Overall, Fitch expects that headline inflation will average at 25 per cent across fiscal 2022-23.

After easing slightly to 23.1 per cent year on year in September, headline inflation rebounded in October to 26.6 per cent as electricity subsidies unwound and food prices rose due to crop damages from the recent floods. Meanwhile, core inflation in urban and rural areas came in at a multi-year high of 14.9 per cent and 18.2 per cent respectively.

Meanwhile, Pakistan’s trade deficit narrowed further from $2.9 billion in September to $2.3 billion in October. That is the smallest monthly shortfall since November 2020. Fitch Ratings thinks that the deficit will remain at around its current levels over the coming months, partly underpinned by its expectations that global commodity prices have already peaked. This will help keep a lid on Pakistan’s import bill.

In addition, the recent drop in Pakistan’s foreign reserves may have already bottomed out. Pakistan’s foreign reserves rebounded to $14.6 billion in October, propped up by the release of $1.5 billion worth of funds from the Asian Development Bank.

Pakistan now has enough reserves to fund 3.1 months’ worth of imports, a touch above the International Monetary Funds’ recommended minimum of 3 months, Fitch noted.

ALCHEMPro News Desk (DS)