Pakistan’s Consumer Price Index (CPI) for December 2024 is projected to clock in at 4.0-4.5% year-on-year (YoY) as per a research by brokerage house Topline Securities. On a month-on-month (MoM) basis, inflation is expected to rise marginally by 0.4%, taking the average inflation for the first half of fiscal year 2025 to 7.35%, a steep drop from 28.8% during the same period in fiscal year 2024.
Food inflation is anticipated to decline by 0.45% MoM, driven by falling prices of chicken, pulses, wheat flour, tomatoes, and fresh vegetables, which have dropped by 1-14%. However, increases in edible oil, sugar, and potato prices—rising by 1-11%—have partially offset the decline.
The housing, water, electricity, and gas segment is expected to decrease by 0.5% MoM, owing to a significantly lower Quarterly Tariff Adjustment (QTA) of Rs0.19/kWh, replacing the previous QTA of Rs1.74/kWh. Conversely, the transport segment is likely to witness a 1.1% MoM uptick due to a rise in petrol and diesel prices by 1.3-1.5%.
Analysts predict inflation will bottom out in March 2025 within the range of 2.75-3.25% before rising again in the fourth quarter of fiscal year 2025. For the full fiscal year, inflation is now expected to average 6.5-7.5%, revised downward from an earlier estimate of 7.0-8.0%, owing to lower-than-expected food and energy prices.
The International Monetary Fund (IMF) has also revised its inflation forecast downward to 9.5% for fiscal year 2025, compared to its earlier projection of 12.7%. Similarly, the State Bank of Pakistan, in its recent monetary policy communication, noted that fiscal year 2025 inflation will fall below its previous forecast range of 11.5-13.5%.
With falling inflation rate, the real interest rate (difference between policy rates and inflation) has widened significantly. With expected inflation of 4.0-4.5% for November 2024, real rates are estimated at 850-900 basis points (bps), far above Pakistan’s historical average of 200-300 bps.
Looking ahead, analysts forecast the interest rate to decline to 11% by December 2025, with positive real rates of 275-300 bps, based on fiscal year 2026’s projected average inflation of 8.25%.
However, any significant deviation in international commodity prices, particularly oil, could impact these projections.
