–CPI inflation rose to 8.5% YoY in March 2014 vs. 7.9% a month prior, while on a sequential basis, March 2014 inflation ticked up by 1.0% MoM.
-Uptick in inflation was largely expected (JS expectation: 8.5%) and was led by a spike in perishable food prices which pushed up food inflation for the month to +9.3% vis-à-vis ~7.4% food inflation over Jan-Feb 2014.
-That said, non-food inflation was contained, slipping to a 6-month low of 8.0% while core inflation also stayed within what appears to be State Bank of Pakistan’s (SBP) comfort zone.
-Resultant 3QFY14 / 9MFY14 inflation stands at a respectable 8.1% / 8.6%. While the IMF recently flagged inflation risk in 4QFY14, we maintain our benign near-term CPI outlook eyeing 4QFY14 / FY14E CPI at 8.1% / 8.5%.
-We maintain our ‘no change’ interest rate call for the May 2014 Monetary Policy Statement, where IMF’s recommendation to continue to tighten should be balanced by positive real 2HFY14E interest rate of ~1.9%.
Food prices push up March 2014 inflation
Pak CPI inflation rose to 8.5% YoY in March 2014 as against 7.9% a month prior, while on a sequential basis, inflation ticked up by 1.0% MoM, relatively sharper than 8MFY14 average monthly inflation of 0.66%. The uptick in inflation was largely expected (JS expectation: 8.5%) on the back of a spike in perishable food prices (+11.8% YoY in March 2014). Recall that the prices of key food items including poultry and fresh produce rose by 2.3-45.8% MoM over the course of the month, pushing up the food inflation reading for the month to +9.3% vis-à-vis an average of 7.4% food inflation over Jan-Feb 2014. Notably, non-food inflation was contained, slipping to a 6-month low of 8.0% while core inflation (Non-food Non-energy CPI and trimmed mean CPI clocked in at 7.6% and 8.1% respectively) also stayed within what appears to be State Bank of Pakistan’s (SBP) comfort zone.
9MFY14 CPI respectable at 8.6%; 4Q risks appear low
Resultant 3QFY14 / 9MFY14 inflation stands at 8.1% / 8.6% (as against 7.4% / 8.0% in the corresponding periods last year); a fairly respectable number in our view, particularly if held up against start-of-the-year concerns on inflation creeping back up into double-digits in 2HFY14. While International Monetary Fund (IMF) recently flagged its concerns on Pak inflation rising to ~10.0% by June 2014 before moderating to the 7% mark in FY15E, our CPI outlook is more benign. We maintain FY14E inflation outlook at 8.5% (at the lower end of SBP’s revised FY14E CPI outlook of 8.5-9.5%) where we flag expected April 2014 / 4QFY14E CPI inflation of 8.3% / 8.1%.
Interest rate view – ‘No change’ the view for May 2014
The SBP’s next Monetary Policy Statement (MPS) is due in May 2014. Moderate inflation numbers notwithstanding, we believe the IMF’s recent stern take on monetary policy stance (the fund was categorical in its view that ‘a tight monetary stance remains important to help accumulate reserves and to contain inflationary pressures’ and recommended both further tightening of monetary policy rate and a more flexible exchange rate) has likely poured cold water over the KSE’s rate-cut hopes. We expect no change in the Discount Rate in the May 2014 MPS where we believe SBP is likely to hold off any pressure for a rate hike on the back of a respectable positive real interest rate (RIR). Recall Pakistan’s 10-year historical average RIR stands at ~1.5% vs. 2HFY14E implied RIR of ~1.9%.