According to a report by JS Global, inflationary pressure in Pakistan is expected to further decrease, potentially reaching single digits starting from August 2024.
The brokerage house forecasted that the Consumer Price Index (CPI) would likely reach 9.3% year-on-year (YoY) in August 2024, with a slight 10 basis points month-on-month (MoM) increase. This would mark the first time in three years for Pakistan to enter single-digit inflation territory.
The report highlighted that while the CPI for July 2024 stood at 11.1% YoY, down from 12.6% in June 2024, the sequential price rises in food, carrying a 35% weight in the CPI basket, are anticipated to outpace the reduction in energy prices.
In recent years, inflation has posed a significant and persistent economic challenge for Pakistan. The country experienced a peak CPI inflation rate of 38% in May of the previous year, but it has been on a decreasing trend since. The July 2024 figure represents the lowest CPI recorded since November 2021, when it was at 11.5%, as per data from the Pakistan Bureau of Statistics (PBS).
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The report also projected that if the expected August 2024 CPI reading materializes, it could boost real interest rates (RIR) back to 10 percentage points or more, a level last observed in May 2024. Furthermore, a potential decrease below 8.5% in the September 2024 reading could expand RIR to around 11 percentage points, a level not seen since mid-1998.
JS Global suggested that the decreasing inflation reinforces the case for the Monetary Policy Committee to continue the easing cycle in the September meeting, potentially leading to a third consecutive interest rate cut of 150 basis points, which would bring the Policy Rate down to 18%. It is important to note that shorter tenor secondary market yields are currently trading approximately 200 basis points below the Policy Rate.
In July, the State Bank of Pakistan (SBP) had reduced the key policy rate by 100 basis points to 19.5%, expressing concerns about the inflation outlook stemming from fiscal slippages and ad-hoc decisions related to energy price adjustments.
