By Staff Reporter
KARACHI: Inflation rate is poised to breach the single-digit barrier for the first time in three years in August, according to a forecast by brokerage houses, which could pave the way for further interest rate cuts by the central bank.
Brokerage JS Global expects the consumer price index (CPI) to rise 9.3 percent year-on-year in August, with a 10 basis point month-on-month increase, driven by sequential price increases in food, which account for 35 percent of the CPI basket.
“Pakistan is likely to enter the single-digit inflation territory for the first time in three years from Aug-2024,” the brokerage said.
The forecast comes as Pakistan’s headline inflation rate fell to 11.1 percent in July, the lowest since November 2021, according to data from the Pakistan Bureau of Statistics. Inflation, which hit a record high of 38 percent in May last year, has been declining steadily since then.
JS Global said the expected reading for August would propel real interest rates back to 10 percentage points, while a reading below 8.5 percent in September would expand real interest rates closer to 11 percentage points, a level last seen in mid-1998.
“While August-2024 (expected) reading is poised to propel real interest rates (RIR) back to 10ppt+, last witnessed in May-2024, Sept-2024 reading potentially dipping below 8.5 percent would further expand RIR closer to 11ppt,” the brokerage added.
The brokerage said the country’s abating inflation strengthens the case for continuing the easing cycle.
“In our view, the abating inflation strengthens Monetary Policy Committee’s case for continuing the easing cycle in the September meeting with a third consecutive interest rate cut, this time of 150bps, bringing the policy rate down to 18 percent. To note, shorter tenor secondary market yields currently trade 200bps below the policy rate.”
Market expectations of further rate cuts were bolstered by a significant decline in Treasury Bill yields on Wednesday, with the 3-month yield dropping to 17.49 percent, a level not seen since January 2023, and the 6-month yield decreasing to 17.74 percent, almost at January levels. The 12-month yield also fell to 16.99 percent, the lowest since December 2022.
The 6-Month Karachi Inter-Bank Offered Rate (KIBOR) also fell by 63 basis points to 17.94 percent, after 19 months, as the market expects the central bank to cut interest rates further in September.
The SBP has already cut its benchmark interest rate by 100 basis points to 19.5 percent in July meeting, citing easing inflationary pressures. The central bank’s Monetary Policy Committee is scheduled to announce its next interest rate decision on September 12.It forecasts inflation to remain within a range of 11.5-13.5 percent in the fiscal year 2025.
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