KARACHI: Sherman Securities its inflation forecast for July 2023, expecting a year-on-year decline to 25.3% from 29.4% in June, due to high base effect. However, the monthly inflation is likely to increase by 1.1%, driven by higher food and housing prices.

Amreen Soorani at JS global Capital expect CPI for Jul-2023 to clock in at 26.6% – lowest YoY reading in last seven months; despite MoM increase of 2.09% and core inflation at 21.84% (up 2.59% MoM). This includes impact of 25%+ increase in power costs (4.6% weight in CPI).

Ahmed Rauf, an analyst at Sherman Securities, said that July inflation reading is likely to be the lowest since Dec-22 on a year-on-year basis, but the monthly inflation is expected to rise due to higher prices of wheat, wheat flour, sugar, milk and tomatoes, as well as periodic revision in house rent and wage rates.

Rauf also said that the impact of the hike in electricity base tariff by around 20% for residential consumers, which was approved by the federal government but not yet notified by NEPRA, was not included in the July inflation forecast. However, if the notification is issued before the end of the month, the July inflation estimate will increase to around 26.2%.

Rauf added that the hike in power tariff and the expected increase in gas prices were some of the key requirements of the recently signed SBA with the IMF, which also increased the upside risks to inflation. Moreover, he said that the depreciation in PKR following the implementation of market determined exchange rate mechanism would also weigh on inflation going forward.

However, Rauf said that he believed that the government’s average FY24 inflation target of 21% was achievable compared to IMF projection of 25.9%.

On the monetary policy front, Rauf said that he expected a status quo stance in the upcoming MPC meeting to be held on July 31, 2023, as interest rates on forward looking basis were already in the positive territory and secondary market yields were in line with historical average.