Two brokerage houses anticipate a significant decrease in CPI-based inflation, with estimates ranging from 13% to 14% for May 2024.
According to JS Global, May’s CPI is expected to register at 13.8%, largely attributed to a high base effect from the previous year and consecutive monthly declines, particularly in food inflation.
While Pakistan’s headline inflation in April stood at 17.3% year-on-year, down from March’s 20.7%, JS Global emphasizes the importance of monitoring inflation projections from July onwards and their impact on monetary policy.
JS Global notes that the State Bank of Pakistan (SBP) considers factors such as the Federal Budget FY25 announcement in early June and the subsequent implementation, as well as adherence to IMF recommendations in its upcoming program, as crucial determinants of monetary policy direction.
In its previous Monetary Policy Committee (MPC) meeting held on April 29, the SBP acknowledged persistently high inflation levels and suggested that upcoming budgetary measures could affect near-term inflation forecasts. The MPC reiterated the need to maintain the current monetary policy stance to achieve the inflation target of 5–7% by September 2025.
Additionally, Ismail Iqbal Securities projects May’s inflation to reach 13.1%, according to its separate report.
Inflation for May is anticipated to decrease by 2.1% on a month-on-month basis, primarily attributed to a decline in food inflation, notably in wheat, chicken, fresh fruits, onions, and tomatoes, along with a downward FCA adjustment of 1.8%. Ismail Iqbal Securities highlighted that real interest rates are projected to reach their highest level in the past two decades at 8.9%, surpassing the previous high of 5.4% in April 2015.
This significant disparity between the policy rate and the CPI is expected to pave the way for a rate cut in the upcoming Monetary Policy Committee meeting, as the substantial drop in inflation, primarily due to reduced food prices, was unforeseen at the year’s outset.
Budget to drive inflation upwards
Authorities in Islamabad are set to unveil the budget for the fiscal year 2024-25 in the National Assembly on June 7.
JS Global’s report anticipates that the budget, aimed at addressing fiscal challenges and securing a longer-term IMF plan, may incorporate higher levies and taxes.
The report outlines a sensitivity analysis, considering scenarios such as a significant rise in petroleum prices and an increase in food and restaurant prices, projecting a potential inflation rate of around 15% for the fiscal year 2024-25.
