The country’s interest rate is projected to decrease to 17 percent by May2024, allowing the central bank to potentially reduce the policy rate to 19percent by the end of the current fiscal year FY24, as per a report fromArif Habib Limited (AHL).
FY24 began with a high year-on-year (YoY) headline inflation, averaging27.8 percent in Jul-Aug, and spiked to 31.4 percent in September 2023,primarily due to a low base effect and rising fuel costs. The secondquarter is expected to maintain high headline inflation due to increasedgas tariffs, elevated international oil prices, and moderate depreciationof the PKR, according to the report.
Inflation is anticipated to moderate in the third quarter, with both YoYand MoM rates showing a decreasing trend. YoY CPI is projected to graduallydecline from 26.4 percent to 19.4 percent, indicating a slowdown in priceincreases compared to the previous year, mainly due to a high base effect.
The report suggests that with the expected decrease in inflation to 19percent by March 2024, there is room for the central bank (SBP) to considerinitiating a policy easing move, possibly announcing a 100bps reduction inMarch 2024. This would be the first rate cut since June 2020, after a gapof over 3.5 years.
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Furthermore, the report anticipates a significant decrease in both YoY andMoM inflation rates in the fourth quarter. YoY rates are projected to dropfurther to 17 percent in May, providing additional leeway for the SBP toreduce policy rates, especially as real interest rates turn positive. Thereport expects the central bank to cut rates by 200bps in this quarter,ending FY24 at around the 19 percent level.
