SBP will likely maintain the policy rate at 22% during the first meeting of CY24.

The MPC is scheduled to convene its upcoming session in Jan’24, marking the first meeting of CY24. It is anticipated that the SBP will maintain the policy rate at 22% during this meeting.

To recall, in the last scheduled meeting of Dec’23, SBP maintained the policy rate unchanged at 22%, citing that the decision took into consideration the impact of the surge in gas prices in Nov’23, which exceeded the MPC’s initial projections for inflation. The MPC acknowledged that this could have repercussions for the inflation outlook, but also noted certain mitigating factors, such as the recent decline in international oil prices and improved availability of agricultural produce. It also evaluated that the real interest rate remained positive when assessed on a 12-month forward-looking basis.

Our projections point towards a downward trajectory in headline inflation during the latter half of FY24. The average MoM rate is projected to hover around 0.6% in 2HFY24, a significant decrease from the 1.7% average witnessed in 1HFY24. This forecast culminates in an estimated annual average of ~24% for headline inflation in FY24 (FY23: 29.2%). Several contributing factors, including the substantial base effect, stabilization of global commodity prices, support from the stability of the PKR against the USD, and efforts to curtail the current account deficit, underpin these expectations.

Moreover, the recent LSM data published indicates a downtick of 4.08% YoY in Oct’23. However, on a MoM basis, LSMI recorded a decline of 2%. With this, during 4MFY24, LSM achieved a negative growth of 0.44% YoY. In our opinion, the easing of import restrictions remained crucial for driving the growth of LSMI. We believe, this has contributed to the improved availability of key production inputs.

On the external front, during 5MFY24, CAD saw a remarkable 64% YoY decline, amounting to USD 1.16bn. This stands in stark contrast to the corresponding period in the prior year, where a deficit of USD 3.26bn was recorded, on the back of a 28% YoY reduction in trade deficit. Additionally, the improvement in SBP reserves, rising from USD 4.4bn at the end of Jun’23 to USD 7.76bn (22-Dec-23), contributed to a 1.47% strengthening of the PKR against the USD. This, in turn, played a role in controlling imported inflation to a certain extent.

Courtesy – AHL Research

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