Inflation set to hit 9-year low at 2.7% in January

January 31, 2025 (MLN): Headline inflation is likely to clock in at 2.7% YoY in January 2025- marking a 9-year low, compared to 4.1% in the previous month and 28.3% in January 2024.

On a sequential basis, inflation is expected to stand at 0.49% MoM in January 2025, compared to 0.1% MoM in December 2024 and 1.8% in January 2024.

This would bring the average yearly inflation for 7MFY25 to 6.6%, compared to 28.7% in 7MFY24.

This is primarily driven by a favourable base effect from mounting inflation of the previous year and comes despite a 0.49% MoM increase in headline inflation.

Thanks to the decline in food prices, food inflation is expected to drop by more than 2% in January 2025.

Within the SPI basket, items that recorded significant increase in prices during the month include Tomatoes, Potatoes, Eggs, Onions, Pulse Gram and Pulse Mash which noted significant decline in prices by 21.8%, 21.37%, 12.84%, 12.08%, 3.54% and 2.06%, respectively compared to the last month.

In addition, household index will be provided some cushion as electricity charges have been reduced by 7.48% compared to the last month. Further the Gas charges remained unchanged.

It is important to mention that National Electric Power Regulatory Authority (NEPRA) has reduced the base tariff by 49 paisa per unit, bringing electricity rates down to Rs. 6.06 per unit. Additionally, LPG prices have decreased by 46 bps MoM.

Looking ahead, electricity rates are expected to drop further by Rs. 10 to 12 per unit as Federal Minister for Energy Awais Leghari engages in discussions with the International Monetary Fund (IMF).

In addition, the PM Winter Package is expected to provide further relief.

Interest Rate:

On the interest rate front, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) reduced the policy rate by 100 basis points to 12%, effective January 28, 2024, in line with market expectations.

The reduction was the sixth in a row, bringing the total decrease since June 2024 to 1,000bps as a slowdown in inflation gives policymakers room to continue monetary easing in a bid to spur growth.

Despite such a significant reduction, the ongoing sharp disinflation has kept the real interest rate (RIR) at 9.3%, with January’s expected inflation at 2.93%.

The reduction in policy rate is mainly attributed to the significant decline in inflation which has dropped to 4.1% in December 2024—the lowest since May 2023 where it stood at 38%.

The SBP Chief attributed the policy rate reduction to an improved economic outlook. On the external front, Pakistan recorded a current account surplus of $582 million in December 2024, taking the 6MFY25 surplus to $1.21 billion.

Meanwhile, workers' remittances increased by 29.3% in December to $3.08 billion. In 6MFY25, total remittances stood at $17.84 billion, providing much-needed support to the external sector.

For FY25, the MPC has revised the target of headline inflation to average between 5.5% – 7.5%.

Regarding its outlook, the SBP is of the view that the inflation outlook is subject to several risks, including volatile global commodity prices and protectionist policies in major economies.

Additionally, the timing and magnitude of administered energy tariff adjustments, fluctuations in perishable food prices, and any further measures to meet revenue targets could also impact the inflation trajectory.

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