Karachi, October's Consumer Price Index (CPI) indicates a significant slowdown in inflation, positioning it at its most modest pace since January of the same year. Despite certain factors, such as house rent adjustments and a month-on-month rise in electricity costs, a decline in prices of POL products and food contributed to this subdued inflation rate. Such developments are aligning market actions with the possibility of not only a peak in interest rates but also the potential for upcoming rate reductions.
According to a research report by JS Securities Limited, the anticipated inflation rate for October 2023 is 70bp month-on-month (MoM), a marked reduction compared to the last year's average of approximately 230bp MoM. This calculation would position the CPI for the said month at 26.4%. The report underscores that, besides the quarterly house rent amendments and the increment in electricity prices, the lessened CPI pace can be attributed to the descent in POL product costs and a significant 89bp MoM drop in food prices.
Recent auction activities, particularly in the T-Bill segment, further bolster these findings. The auction observed a participation eight times its target for the 12-month T-Bill, prompting speculation on the prospect of an impending decrease in interest rates. Current data reveals that, based on a 12-month forward-looking CPI, real interest rates have been in the positive realm since September 2023. If the trend remains devoid of adverse CPI fluctuations, the State Bank of Pakistan (SBP) might lean towards an early initiation of monetary easing.
Factors like the delay in the gas price hike announcement and the non-inclusion of the recent ~8% cut in POL product prices, owing to data collection timelines, have also been accounted for in these projections. Notably, had the latter been considered, the October CPI estimation would have further decreased to 26.18% (53bp MoM).
Drawing a parallel with past market behaviors, there's a palpable anticipation for an earlier start to the monetary easing cycle. The last occasion when similar market participation was noted dates back to early 2020, which directly preceded the onset of a monetary easing phase. While primary projections speculate the first rate cut around March 2024, earlier adjustments cannot be entirely dismissed. Crucially, these projections rely on several factors, including the performance of the PKR against the US dollar, the dynamics of international oil prices, and the anticipated trajectory of the CPI over the next year.