The MPC is set to commence its next meeting on October 30, 2023, and we expect the SBP to hold the policy rate at 22% in this meeting.
To recall, in the last scheduled meeting of Sep’23, SBP maintained the policy rate unchanged at 22%, citing that the decision took into consideration the latest inflation trends, which indicated a sustained decline in inflation rates, dropping from its peak of 38% in May to 27.4% in Aug’23. Despite recent increases in global oil prices, the committee anticipated that inflation will continue its downward trajectory, particularly in the latter half of the year.
We also expect the headline inflation to continue its downward trajectory in the upcoming months, with the average MoM rate projected to be 1.03% until Jun’24. This projection is expected to result in an annual average of ~24% for headline inflation during FY24. These expectations are based on several factors, including reduced demand-side pressures, the stabilisation of global commodity prices, and the influence of a high base effect. This stands in contrast to the FY23, where the average headline inflation rate was higher at 29.2%.
Moreover, the recent data published by PBS indicates an uptick in the output LSMI for Aug’23, showing a 2.5% increase on a YoY basis. After 14 months, LSM finally saw positive YoY growth in Aug’23. In addition, LSM’s MoM growth reached its highest point in 9 months (Dec’22), up 8.4%. With this, during 2MFY24, LSM achieved a positive growth of 0.5% YoY. We believe that the relaxation of import restrictions has been a pivotal factor in driving the growth of the LSMI. Therefore, we believe choosing not to raise interest rates further and instead opting for a monetary policy that promotes easing will likely strengthen the growth prospects of the LSMI and the overall economy.
On the external front, recent Balance of Payment data demonstrates a significant turnaround. In 1QFY24, the CAD declined by 58% YoY to USD 947mn, in contrast to a deficit of ~USD 2bn recorded during the same period in the previous year. This positive change was primarily attributable to a 34% YoY reduction in the trade deficit. As a result of a contained CAD, disbursements from IMF/friendly countries and crack-down measures, the PKR made a remarkable recovery, particularly in Sep’23, showing a 6.2% gain against the USD.
Courtesy – AHL Research