· National CPI was recorded at 24.9% in Jul’22, driven by higher international oil prices and weakness in the currency. To recall, CPI rose by 21.3%YoY in Jun’22, taking FY22 average inflation to 12.15%, well above SBP’s forecast of 9% – 11%. Average inflation for FY23 is forecasted at 21.4%, compared to SBP’s forecast of 18%-20%.

· Policy rates have been increased to 15%, with a recent hike of 125bps announced in the last MPC. The continuance of inflationary pressures warrant further policy rate hikes. We expect policy rate to settle between 16% – 16.5%, with negative real interest rates continuing through FY23.

· The country’s liquidity issues and the resulting default fears have led to higher international bond yields, with the yield on the international sukuk with Dec’22 maturity increasing to 48.31%. The situation has been further exacerbated by the recent downgrade of Pakistan by Fitch.

· Majority of the participation in the Jul 27 T-Bill auction was concentrated in the lower-term 3M Tenor, with 94% of bid amount accepted in the tenor, signaling bond market players expecting further interest rate hikes.

· Investors are recommended to invest in short-term bonds, which offer higher liquidity and attractive rates, given the interest rate outlook.

Courtesy – AKD Research