CPI expected to fall below 1% YoY; Record low in over 3 decades; likely to bottom out

ISLAMABAD: Pakistan’s Consumer Price Index (CPI) for Mar 2025 is expected to bottom out and clock in at 0.5-1.0% YoY (+0.9% MoM), lowest monthly YoY reading in over 3 decades, taking 9MFY25 average to 5.38% compared to 27.06% in 9MFY24.

During Mar 2025, amidst Ramadan, Food Inflation is expected to increase by 2.5% MoM primarily due to 43% increase in prices of tomatoes, expectations of 25% increase in fresh fruits, and 10% increase in fresh vegetables. Prices of chicken and Eggs have also increased by 15% MoM each. While prices of onion, tea and pulses are down by 7-21%.CPI Inflation Hits at 11.76% in May 2024

Housing, water, electricity and gas segment is expected to witness approx. 0.35% MoM decline. Within this segment, electricity prices are expected to come down by 2.3% due to relatively higher fuel cost adjustment of Rs2/kwh compared to Rs1/kwh last month. Quarterly Tariff Adjustment (QTA) of +Rs0.1957/Kwh expired last month, while for Mar-May 2025 QTA is not approved yet, which as per NEPRA is -Rs2/unit. If this is notified timely, this will further reduce electricity index by 6.27%, reducing headline inflation by further 15bps.

Transport segment index is expected to come down by 0.7% MoM due to decline in diesel and petrol prices by average 2%.

For FY25, we revise down our inflation forecast from 6-7% to 5-6% owing to falling oil prices, and stability in non perishable food prices i.e. wheat. We will issue more details on this and on other indicators in our quarterly economy report, to be released in Apr 2025.

Real Rate in Mar 2025: With inflation expectations of less than 1% for Mar 2025, real rates will be 1100-1150bps, significantly higher than Pakistan’s historic average of 200-300bps. However, based on FY26 inflation estimate of 8-9%, the real rates are 300-400bps positive.

Interest rate outlook: We believe central bank has further room to cut policy rate by 100bps based on average FY26 inflation estimates, however, given the IMF review, budget FY26 and rising imports, SBP may pause rate cut cycle till 1H2025.

Central Bank also expects inflation for FY25 in the range of 5-7%.

Key Risks: Any major deviation in commodity prices from current levels (i.e. oil US$75/barrel for FY26) may result in change in inflation estimates.