Inflation rebound to keep interest rates honest

Consumer price inflation climbed back into double digits in August, with headline inflation reaching 11.1 percent after 9.2 percent in July, according to Business Recorder. Month-on-month prices rose 1.2 percent, extending a run above 1 percent to a second consecutive month. The State Bank's cautious monetary stance is reinforced, since inflation is seen staying above its 5-7 percent medium-term target through FY27.

Food and transport costs stood out in the latest data. Food inflation climbed 1.7 percent month on month, with onion prices up 48.4 percent, while urban wheat prices were 87 percent higher than a year earlier amid higher international prices and low government stocks. Transport costs rose 3.4 percent in the month and 20.2 percent annually, as elevated petroleum prices, high refining margins for HSD and continued petroleum levy collections kept domestic fuel prices high.

The external account and policy outlook point the same way. The REER index is close to 108, and the PKR/USD rate would likely need to cross the 300 mark to bring it back toward 100, assuming other variables stay broadly unchanged. At August's inflation the real policy rate is barely 0.4 percent positive, so the analysis sees rate cuts over the coming reviews as increasingly hard to justify, with another hike possible if pressures persist.