–We expect CPI inflation to moderate somewhat to 10.1% in December 2013 as against November 2013 16-month high of 10.9%. The same signifies a 0.5% MoM decline in inflation.
–Lower inflation reading for the month is primarily expected on the back of a noticeable decline in prices of key perishable food items with an end to the transporters strike. Resultantly, we eye December 2013 food inflation at 11.0% YoY vs. 13.0% YoY in November 2013.
–Anticipated moderation in inflation is naturally positive and coupled with recent stability on the exchange rate front, could take the edge off inflationary expectations, building a case for a ‘blue skies’ scenario (i.e. mild rate hike) in the upcoming January 2014 Monetary Policy Statement.
–We meanwhile believe Pakistan is not yet out of the woods on inflationary and interest rate risk where (1) non-food inflation is trending higher (9.2% eyed in December 2013) and (2) 2HFY14 inflation is expected to be higher due to low-base effect and higher energy prices.
–We hence eye a 50bp increase in the Discount Rate (to 10.5%) in the January 2014 MPS and a further 50bp rate hike before June 2014.
Dec-13 CPI to moderate to 10.1%…
After hitting a 16-month high of 10.9% YoY last month, we anticipate some moderation in CPI inflation to 10.1% YoY in December 2013. The same signifies a 0.5% MoM decline in inflation where December 2013 CPI outlook is now softer than our preliminary estimate (10.7% YoY). Lower inflation reading for the month is primarily expected on the back of a noticeable decline in the prices of key perishable food items (onions -16.1% MoM; potatoes -31.5% MoM; tomatoes – 48.4% MoM) due to the end of the stalemate between transporters and the government. Recall the same had dragged out over November 2013 and resulted in pushing up food inflation to 13.0% YoY compared to 9.8% food inflation (9.1% general CPI) in October 2013. We now eye December 2013 food inflation at 11.0% YoY while 1HFY14 CPI is expected to stand at 9.1% as against 8.3% in 1HFY13.
…and could boost sentiments
Anticipated moderation in inflation (vs. November 2013 high) is naturally positive and is coupled with recent stability on the exchange rate front where PKR has strengthened by 1.6% vs. the USD so far in December 2013 and currently stands at Rs106.59/USD vs. November 2013 close of Rs108.39/USD. The two in tandem could take the edge off recently heightened inflationary expectations, building a case for a ‘blue skies’ scenario (i.e. mild rate hike) in the upcoming January 2014 Monetary Policy Statement.
2HFY14 inflation uptrend intact; Jan-14 rate hike likely
From our vantage point, we believe Pakistan is not yet out of the woods on inflationary and interest rate risk. While food (34.8% weight in overall CPI basket) has always played the deciding role in inflation, note that ex-food CPI is also trending higher with non-food inflation clocking in at 9.4% YoY last month and expected to tick in at 9.2% YoY in December 2013 as compared to an average of 7.6% over Jul-Oct 2013. Note also that while December 2013 is a step-down vis-à- vis November 2013, CPI is still expected to register in double-digits. Meanwhile, although 1HFY14 CPI averages 9.1% as against the Discount Rate (DR) which stands at 10.0%, 2HFY14 inflation is expected to be higher at ~11.0% given (1) the low base effect of 2HFY13; (2) continued impact of power tariff hikes and (3) impending December 2013 gas tariff hike. Given the above, we eye a 50bp increase in the DR to 10.5% in January 2014 MPS and a further 50bp rate hike before June 2014.