Headline inflation flat in Feb, but March uptick looms, forecasts Finance Division

After holding steady in February, Pakistan’s headline inflation is expected to edge higher in March but will continue to taper off through the year, a report by the Finance Division projected on Thursday, citing improving growth prospects.

“Inflation is anticipated to remain within the range of 2-3% for February, however, there are prospects of a slight increase to 3-4% by March,” stated the “Monthly Economic Update and Outlook,” for February 2025 issued by the Finance Division’s Economic Adviser’s Wing.

The holy fasting month of Ramadan, commencing in Pakistan on March 2, often sees a seasonal rise in food inflation as households increase their spending. Food, beverage, and other edibles’ prices usually surge in Ramadan, putting pressure on household budgets and leaving many desperate.

The outlook notes that a significant let-up in inflationary pressures on top of a supportive monetary policy is slated to boost business morale and underpin the recovery of Large-Scale Manufacturing (LSM). The report however said that export-oriented industries grew despite the slow recovery in the LSM sector.

“The steep decline in inflation fostered a stable financial environment, enabling the central bank to steadily reduce the policy rate,” the report said. “Economy continued to demonstrate positive developments during July-Jan FY25, as evidenced by improvements in key economic indicators.”

Last month, State Bank of Pakistan cut its benchmark interest rate by 100 basis points to 12% as inflation continues to weaken and growth looks to set to rebound after 1,000 basis points of rate cuts over the last half year.

The rates were brought down from an all-time high of 22% last June — one of the most aggressive moves among central banks in emerging markets and exceeding its 625 bps of rate cuts in 2020 during the COVID-19 pandemic.

The CPI-based inflation stood at 2.4% year-on-year in January 2025, down from 4.1% in December 2024, data from the Pakistan Bureau of Statistics (PBS) showed that.

“The [MPC) decision was based on inflation outcome in line with expectations, supported by moderate domestic demand conditions and supportive supply-side dynamics,” the report stated.

The stubbornly high headline inflation has been a persistent economic challenge for the country, hitting a record high of 38% in May 2023 but has since followed a downward trend.

The ministry in the economic outlook maintains that higher growth in remittances and FDI further strengthened sentiments of the economic agents, adding, these factors collectively indicate positive prospects for economic growth in coming months.

“On the external front, exports, imports, and workers’ remittances are expected to maintain their upward trend. In the coming months, remittances are likely to increase further due to seasonal factors such as Ramadan, Eid-ul-Fitr & Eid-ul-Adha,” the report said.

The outlook also projected the exports and imports to improve due to the expansion in economic activity, while all these factors are expected to help keep the current account deficit within manageable limits.