Real interest rate likely to turn positive in March after 3 years

March 06, 2024 (MLN): The real interest rate (RIR) will likely turn positive this month for the first time in over three years, as the favorable base effect and record high interest rates continue to slow down inflation pace.

The consumer price index (CPI) will fall below the 22% policy rate in March if the monthly inflation records an increase of less than 2.82%, which is larger than the last 12-month average of 2%.

The current RIR, the difference between the policy rate and inflation, has narrowed to just -1.06%, the smallest since May 2022.

Inflation eased to a 20-month low of 23.06% in February from a year earlier, as prices rose just 0.03% from the previous month, coupled with a high base.

The RIR is expected to turn positive starting from March, and widen further in the following months.

If consumer prices rice an average 1% a month for the remainder of the current fiscal year, the annual inflation will drop to about 19% by June end.

With a 0.5% monthly increase, the annual inflation will fall to about 16.7% by June.

To note, the State Bank of Pakistan has kept the policy rate unchanged at 22% since June 2023.

Market is once again ramping up bets for start of monetary easing. The next rate decision is due on March 18, however, the SBP may wait until at least April before cutting rates.

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