Inflation, Interest Rates to start declining from March-2024: AHL

October 3, 2023

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Arif Habib Ltd, a prominent Research & Brokerage House has released their Inflation and Interest Rates forecast where they expect that inflation has reached its peak and will gradually decline over the next six months.

The report states that this is a key reason why the State Bank of Pakistan (SBP) has maintained the policy rate unchanged in its recent reviews. While headline inflation is expected to remain elevated in the remaining months of 2023, with an average Consumer Price Index (CPI) of 28.6% YoY in the fourth quarter of 2023, mainly due to aggressive tariff increases, a significant decline is anticipated in the second half of fiscal year 2024 (2HFY24). By April 2024, inflation is expected to decrease to around 17%, driven by a combination of the high base effect and slower month-on-month (MoM) inflation.

AHL research further states that the anticipated decline in inflation should provide room for the SBP to initiate monetary easing, with a potential 300 basis points (bps) rate cut in 2HFY24 starting from March 2024. The model forecasts a continued downtrend in headline inflation, reaching approximately 17.7% by June 2024, with an overall average of 24.5% for FY24, compared to 29.2% in FY23.

The second quarter of FY2024 is expected to continue to experience high headline inflation, attributed to factors such as an increase in gas tariffs, elevated international oil prices, and moderate depreciation of the Pakistani Rupee (PKR). However, inflation is projected to moderate from January 2024 to March 2024, with both year-on-year (YoY) and MoM rates showing a receding trend. YoY CPI is expected to gradually decline from 26.4% to 19.4%, primarily due to the high base effect, indicating a slowing pace of price increases compared to the previous year. MoM rates are also expected to be positive but relatively lower, suggesting reduced monthly price growth.

As inflation is anticipated to decline further to 17.0% in May 2024, there will be ample room for the SBP to consider policy rate cuts, with a potential reduction of 200 bps in the last quarter of FY24. This would mark the first rate cut in over 3.5 years. Several factors contribute to declining inflation, including the high base effect, which typically exerts downward pressure on inflation, and the likelihood of easing food inflation due to abundant production of essential crops like wheat and rice.

Core inflation, excluding food and energy, is also expected to show a declining trend after peaking at 22.1% in September 2023, indicating an improving inflation outlook. Arif Habib Ltd expects a cumulative reduction of 300 bps in the policy rate across FY24, with an initial cut of 100 bps expected in March 2024, followed by the remainder in the fourth quarter. Further deceleration in inflationary pressures in the first half of FY25 may result in an additional 500 bps reduction in the policy rate during that period, leading to a cumulative reduction of 800 bps in CY24.