Islamabad January 3 2023: Hotter-than-expected inflation in December raises the risk that the State Bank of Pakistan will raise rates at its January meeting, according to Bloomberg.
This would be a mistake, in our view, given that devastating floods have already slowed growth near to a halt.
We see CPI gains cooling in coming months on a combination of improved food supply, softer global commodity prices and waning demand. Any further rate hikes would likely push the economy into contraction.
The CPI climbed 24.5% year on year in December, following a 23.8% rise the prior month. That was above the consensus forecast of 24% and our estimate of 23.9%.
Faster-than-expected inflation poses an upside risk to our interest rate forecast. Our base case is for the central bank to hold its key rate at 16% through June to support growth. We think it has tightened too much already.
Food and transportation remain the biggest contributers to inflation. Food prices, which have been inflated by supply disruptions from heavy flooding, rose 35.5%, up from 31.2% in November.
Food inflation should cc.l in coming months as supply improves. On a month-on-month basis, food inflation has been on a downward trajectory since September. Food prices fell 0.1% month-on-month in December.
Gains in transportation prices slowed to 41.2% from 44.2% the prior month, helped by the government’s cut to retail gasoline prices in December
