Excerpts from the statement by the State Bank of Pakistan:
The key macroeconomic indicators have improved further since the last monetary policy decision of November 2014. CPI inflation and its expectations continue to follow a downward trajectory. In the last two months of November and December 2014 trade deficit has declined, though it has increased in H1-FY15 when compared to H1-FY14. Moreover, considerable foreign exchange inflows have contributed in maintaining an upward trajectory in foreign exchange reserves. Containment of fiscal deficit thus far is also encouraging and bodes well for the credibility of consistent and coherent policies of the government and for the continuation of official and private capital inflows. With these positive developments, first half of the current fiscal year ended on a better macroeconomic outlook for the remaining months of FY15.
While the impact of recent policy rate cut on the economy is subject to a lag, various other factors continued to pull the headline CPI inflation on YoY basis down to 4.3 percent in December 2014. This disinflation is broad based as both food and non-food inflation have been declining. The deceleration in the former is mainly the result of better supply conditions, while the latter is explained by a combination of factors. These include plummeting international oil price as well as decline in other global commodity prices; lagged impact of earlier conservative monetary policy stance and moderating aggregate demand; and stable exchange rate.
It is pertinent to note here that while the recent plunge in international oil price has induced low inflation and improved trade outlook, it is not without some subtle risks to future inflation. The speed and intensity, with which the inflation has come down and continues to recede, can induce expectations of rather low inflation, which may induce additional consumption. There is no doubt about the redistribution of income from oil producers to oil consumers and since the latter has a higher propensity to consume, there will be some affect on private consumption. Thus, the recent reduction in domestic commodity prices may lead to more spending and as long as additional impact on aggregate demand remains in line with aggregate supply, inflation is likely to remain low.