Colombo Consumer Price Index (CCPI) inflation was reported at 35.3% in April 2023, down from dizzy heights of 69.8% recorded in September 2022. This is in line with our expectations, and we expect headline inflation to come down to low single digits by the end of the year, A question we often get asked is “How is that even possible?” The three highest-weight items in the CCPI basket, Utilities (31.5%), F&B (26.2%) and Transport (12.5%) account for more than 70% and have a disproportionate impact. F&B inflation, which peaked at 94.9% in September 2022 was down to 30.6 % in April 2023. Transport, which peaked at 150.4% in September 2022 was down to 32.3% in April 2023. With crops cultivated with chemical fertilizer beginning to reach the market and reduction in transportation costs we expect to see absolute levels of food prices to continue to come off. We also expect Headline inflation to continue to ease off with the impact of base effects of the currency depreciation and fuel price adjustments.
With inflation coming off sharply, we expect the Central Bank to cut policy rates towards the end of the year to stimulate growth. The higher inflation that we have seen has meant there has been higher than-average nominal growth in corporate revenues, even against the backdrop of reducing volumes, with price increases offsetting volume drops. Falling interest rates will also ease the short-term working capital funding pressure. These could translate into higher nominal bottom lines for corporates. Falling interest rates will also lead to mark-to-market gains on bond positions, although such gains can come under pressure in the event of a domestic debt restructuring. In this backdrop, we continue to be bullish in both equity and long-term debt markets.