- Short-Term Inflation Expectations: Inflation in Pakistan is showing a significant downward trend, with headline inflation projected to ease to 3.06% in Jan’25, marking the lowest level in ~9 years. This follows a YoY inflation of 4.1% in Dec’24, which was already an 80-month low. For context, inflation was a staggering 29.7% during the same period last year. Inflation is expected to remain below 5% through Apr’25, driven by the favorable base effect. However, a reversal in this downward trend is likely in May and June, with inflation projections rising to 8.81% and 8.97%, respectively. This uptick is expected as the base effect dissipates after 1QCY25, pushing inflation upward.
- Key Drivers of Inflation Decline: The sharp decline in inflation is attributed to several key factors, including the high base effect, PKR stability against the USD, and subdued prices in food and energy sectors.
- Revised FY25 Inflation Projections: Based on updated assumptions—including the removal of the previously anticipated 5% GST hike on petroleum products, an increase in the PDL from PKR 60 to PKR 70 per liter, and revised Fuel Charges adjustments—we have recalibrated our inflation expectations for FY25e. Average headline inflation is now forecasted to be around 6.5%, with a further rise to 9-10% in FY26f.
- Real Interest Rate and Policy Implications: The real interest rate is projected to reach 9.98% in Jan’25, significantly higher than its historical average of ~2.5%. Additionally, the historical spread between policy rate and core inflation has averaged around 1.7% over the past nine years. These indicators suggest that the SBP has substantial room for further rate adjustments.
- Monetary Policy Outlook: Given the current economic conditions, we anticipate a 100bps rate cut in the upcoming monetary policy meeting of Jan’25. This would bring the policy rate down to 12%.
Courtesy – AHL Research
