We estimate Pakistan’s CPI inflation to register at 31.2% during Sep23 as against 27.4% during Aug23 and 23.2% during Sep22. Monthly inflation is estimated at 1.8%, largely driven by surging domestic fuel and higher food prices. Average CPI during 1QFY24 is estimated at 29.0% against 25.1% SPLY.

Low inflation base causing monthly CPI to peak in Sep 23: The relatively higher inflation estimate of 31.2% is largely due to Sep22’s low base. Recall that the month’s inflation reading fell by 1.2% MoM because of a downward revision in electricity prices. We project that Sep23’s CPI figure will likely be inflation’s peak and we see inflation readings to inch downwards in the coming months as the high base kicks in.

Administrative efforts paying dividends: The incumbent government, in tandem with the central bank, has taken major steps to address the issues of currency speculation, rampant smuggling and commodity hoarding. Reforms introduced in the currency market have allowed the Pak Rupee to regain nearly 6% of its value over the past month. Furthermore, actions to combat smuggling and hoarding have reduced domestic food rates, with price corrections being observed in wheat, oil, and sugar. These efforts have contained the general inflation outruns and have compelled us to revise our inflation projections to 23% in FY24.

Rising oil prices, however, may lead to upside risks: The demand-supply imbalance, driven by the OPEC+ supply cuts, has caused international crude to rise by nearly 10% MoM and inch towards the USD 100/bbl mark. Moreover, global refined fuel prices have outpaced the increase in crude (evident by rising refining spreads), resulting in a sharp surge in domestic petroleum prices. While the Pak Rupee’s strengthening may contain the potential rise in domestic fuel rates, upside risks still exist, especially given Russia’s recent ban on diesel exports.

Interest rates appear to have peaked: In its recent communications, the SBP remains adamant in its view of no further hikes in the country’s interest rate. It justified its recent policy decision on easing monthly inflation prints, even incorporating outruns led by energy tariff adjustments and rising domestic fuel prices. The SBP placed its stock on the successful administrative efforts undertaken by the government to address currency speculation and smuggling. It also highlighted the rising agricultural yields and their ability to alleviate domestic food price pressures. Barring any unforeseen shocks, the central bank will likely commence the monetary easing cycle as early as Mar24, during which CPI is projected to fall below the 20% mark.

Courtesy – BMA Capital Management Ltd.