Inflation drops another notch; DR expected to follow
CPI inflation for October 2012 dropped to a three-year low of 7.66%, supported by benign Food inflation (at 5.8%YoY) and continued low reading for the Housing and Fuel group (at 4.2%YoY) in the aftermath of July’s sharp reduction in domestic gas tariff. With 4MFY13 CPI averaging 8.78%YoY vis-à-vis 11.38% in the corresponding period last year, we expect to see the decibel of policy rate cut cries to go up a notch where the State Bank of Pakistan (SBP) is due to announce its next Monetary Policy Statement (MPS) in early December 2012. While sub-8% CPI was largely expected by equity market participants, the KSE cheered the realization of its expectations with a 0.8% rise post CPI data release. Recent fixed income market trends also vet the KSE-100’s rate cut optimism, where last week’s T-bill auction saw yields across 3M, 6M and 12M paper drop by 36-41bp (to 9.23- 9.35%) while the PIB auction a week prior saw a 13-17bp decline in yields.
Rate cut likely – caution advised on over-optimism
We believe a 50bp cut in the policy rate (to the much awaited single-digit level of 9.5%) is on the cards in the December 2012 MPS where, in our view, the SBP is likely to maintain its stance of attaching higher weight to driving economic activity by incentivizing private sector credit offtake. That said, we believe calls for a >50bp reduction in discount rate are premature. We highlight that CPI circling the 8% mark is not something that can be viewed as sustainable over the course of the fiscal year. While we eye soft CPI in November 2012 as well (~8.4% expected with downside risk hinging on CNG prices), we expect inflation to cross 9% by December 2012 and stay on the higher side till end FY13. Our full year CPI outlook is unchanged at 9.3-9.5%. Note that while low October headline CPI is undoubtedly positive, the persistence of Core (NFNE) inflation, which rose by 10.8% YoY and 1.8% MoM, also warrants a more cautious longer term view.