Ramadan factor kicks in, but CPI clocks in sub-8% in July 2014

  • CPI inflation reading in July 2014 CPI clocked in at 7.88%YoY (below the market consensus of 8-8.2%) lower than the June 2014 reading of 8.2%.
  • The Ramadan factor was evident in July’s reading as inflation headed up by a sharp 1.7%MoM as against June’s 0.6% MoM rise.
  • A key driver behind the uptick in both MoM and YoY numbers is higher food inflation which ticked up 7.0%YoY and 2.7%MoM on the back of sharp rise in perishable food items.
  • The relatively ‘tolerable’ inflation reading is likely to keep rate cut hopes alive where we maintain our stance that SBP will lower the DR by 50-100bps in FY15E.

CPI stays within the ‘tolerable’ range despite Ramadan
July 2014 CPI clocked in at 7.88% YoY (below the market consensus outlook of 8- 8.2%) lower than the June 2014 reading of 8.2%. Ramadan factor was evident in the MoM numbers, where CPI rose by 1.7%MoM in July 2014, much higher than the June’s 0.6% MoM rise. The same was also high when held up against the previous 12-month average monthly rise of 0.7%. A key driver behind the uptick in both MoM and YoY numbers is higher food inflation, which rose by 7.0%YoY and 2.7%MoM. The increase in food inflation was primarily because of higher prices of perishable food items (+11.95%YoY and +15.7%MoM respectively). Another notable rise stemmed from Housing, Water, Electricity & Gas segment which ticked up 8.94%YoY and 1.23%MoM on the back of higher electricity charges (+15.82%YoY) and house rent (+1.76%MoM). Meanwhile, transport segment (+1.6%MoM) also contributed to the sequential rise in inflation due to increase in motor vehicle tax announced in the FY15 budget.

Economy Overview

Lowering of DR still on the cards
We maintain our stance that State Bank of Pakistan (SBP) will lower the Discount rate (DR) by 50-100bps in FY15. Moreover, given the relatively soft reading of CPI in July 2014 (CPI touching six month low), probability of SBP slashing the DR in the September 2014 Monetary Policy Statement (MPS) has increased. Another encouraging aspect is the relatively ‘acceptable’ core inflation (NFNE) reading of 8.3%YoY (vs. 8.7% in June 2014) which SBP highlights as more relevant for MPS. In the short term, we also think risk stemming from hike in power tariff has eased off as government is likely to put off power tariff hike until political temperatures drop.




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