Karachi, April 03, 2023 (PPI-OT): Unruly inflation; brace for another rate hike

Headline inflation in the country has ramped up to 35.4%YoY in Mar’23, compared to 31.5%YoY reported in the earlier month. The inflationary pressures were driven by increasing prices of food products in the country, with the food inflation clocking in at 46.9%YoY in Mar’23.

Increased prices of food stuff in the country can be attributed to the shortage that transpired following the floods in Aug’22, along with the shortage as a result of the external liquidity crisis the country is currently going through.

Core inflation, or Non-Food Non-Energy (NFNE) inflation, on the national level (assuming urban/rural weight of 60.2%/39.9%) has crossed 20%YoY in Mar’23, clocking in at ~20.4%YoY, compared to 18.9%YoY reported in the earlier month.

Interest rates in the country have been increased by a cumulative 1,300bps in a span of ~1.5 years. Despite this, inflation is still rampant in the country, and the MPC is likely to hike interest rates by another 200bps as a consequence.

According to the poll of capital market members conducted by AKD, 75% of our participants shared our view of a 200bps in the upcoming MPC meeting, with another ~16.7% indicating that the increase could be north of 200bps.

With heightened interest rates, funding working capital requirements and servicing debt has become a challenge for corporates listed on the PSX. Of note are the highly leveraged industries, such as Cements, Steels, and Textiles. On the other hand, Commercial Banks and E and Ps are expected to be beneficiaries of the increased interest rates.