Karachi, May 29, 2012 (PPI-OT): AKD Securities expects May’12 CPI to clock in at 11.2%YoY. While this translates into a 0.2%MoM increase, YoY CPI is expected to decelerate from 11.3%YoY in Apr’12. This should arise on the back of declining soft and hard commodity prices, also corroborated by the SPI trend which suggests a downtick in price pressures (-0.5%MoM), even as CPI is likely to better reflect increase in power tariffs. As a result, 11MFY12 CPI should average 10.9%YoY, implying continued +ve real interest rates. While this pushes the case for monetary easing, the SBP Governor has reportedly ruled out a lower DR in the near future where risks include 1) persistent GoP borrowing from central bank, 2) rising NDA/NFA ratio, 3) higher probability of fiscal profligacy ahead of elections and 4) PkR weakness vs. the US$. Regarding the latter, while AKD Securities believes increased intervention has stabilized the PkR for now, reserve rundown across FY13 appears inevitable which may lead to a return to formal IMF fold. However, any positive developments on US-Pakistan relations (agreement on Nato transit fee/CSF release) could potentially ease BoP concerns and revive monetary easing if CPI remains below DR.
Inflation Outlook: Recent data suggests SPI has shifted to a MoM decline (-0.5%MoM) which AKD Securities attributes to a price decrease in selected food items (from a global vantage, the TRJ commodity Index is down 15%Y0Y/4%MoM). While power tariffs have increased, CPI should be relatively shielded by lower int’l prices (Arablite has averaged US$100/bbl in May’12 vs. US$120/bbl in Apr’12). Full-year FY12 CPI should average -11%. Going forward, the start of FY13 should see an interim pickup in price pressures (Ramadan starts in late Jul’12) while risks remain in view of 1) PkR/US$ depreciation of 7.2%FYTD leading to imported inflation pressures and 2) potential populist decision making ahead of general elections.
Prospects for Monetary Easing: While +ve real interest rates push the case for monetary easing, the SBP Governor has recently stated that it is unlikely that the DR will come off in the near-future with risks emanating from a chronic fiscal deficit and external account pressures. In this regard, AKD Securities agrees that a fx reserve rundown and subsequent pressures on the currency may lead SBP to err on the side of caution. That said, an improvement in US-Pakistan relations could potentially ease BoP concerns e.g. through Nato transit fees/CSF disbursements etc. Nevertheless, even if monetary easing revives, expected double-digit inflation across the medium-term (rising NDA/NFA ratio) rule out any material cuts in the DR while risks suggest the DR is likely to inch up first before coming off.