-January 2014 CPI inflation was reported expectedly low at 7.9% YoY (Year on Year) (+0.5% MoM), considerably softer than 9.2% YoY CPI reading last month and the recent high of 10.9% YoY in November 2013.
–While food inflation moderated to +6.7% YoY in January 2014 (vs. FY-to-date average of +9.2% YoY), note also the downtick in core inflation to 8.0% / 8.2% for Non-Food-Non-Energy and Trimmed Mean inflation.
-Recent moderation in headline inflation suggests our FY14E inflation outlook of 10.1% may prove to be too high (YTD FY14: 8.8%). Resultantly, we trim our CPI inflation outlook to 9.1% for FY14E where we flag 2HFY14 average expected inflation of 9.3% vs. our earlier outlook of ~11.0%.
-Eyeing lower-than-earlier-anticipated inflation (both headline and core), we also lower our discount rate / interest rate outlook for FY14E where our revised June 2014 discount rate outlook stands at 10.5% (+50bp from current levels) vs. our earlier call of 11.0%.
Mild CPI reading for January 2014
January 2014 CPI inflation was reported expectedly low at 7.9% YoY (JS estimate: 7.8%), considerably softer than 9.2% YoY CPI reading last month and the recent high of 10.9% YoY in November 2013. On a MoM basis, inflation crept up by 0.5% in January 2014, largely led by the periodic house-rent-index adjustment where the MoM inflation is respectable when held up against FY14-to-date average monthly inflation of 0.8%. While the recent bugbear of food inflation moderated in January 2014 (food inflation for the month clocked in at +6.7% YoY vs. FY-to-date average of +9.2% YoY), note also the slight downtick in core inflation to 8.0% / 8.2% for Non-Food-Non-Energy and Trimmed Mean inflation respectively vis-à-vis November 2013 highs of 8.5% / 9.2%. We flag that some of the moderation in inflation is also on account of unchanged domestic gas prices in January 2014 (visà- vis expectations and government plans of hiking the same in its semiannual gas price review), where we estimate every 10% hike in gas prices would add 0.13% to overall monthly CPI and 0.22% to non-food CPI.
FY14 inflation outlook trimmed…
YTD FY14 average CPI inflation now stands at 8.8% YoY as against 8.3% CPI inflation in the same period last year. Meanwhile, given the last two months of decent moderation in headline inflation, we believe our FY14E inflation outlook of 10.1% may prove to be too high. Resultantly, we trim our CPI inflation outlook to 9.1% for FY14E where we flag 2HFY14 average expected inflation of 9.3% vs. our earlier outlook of ~11.0%. The lower 2H CPI outlook vs. our earlier estimates is led by (1) sharply lower food prices in recent months and the government’s decision to maintain wheat support price for FY14, where in the absence of any supply shocks, we see moderate upside to key food prices in the near term; (2) absence of the above mentioned, expected gas price hike (a delayed decision to raise the same backdatedly would pose some risk to our numbers); and (3) recent Pak Rupee stabilization over December/January (PKR appreciated by 2.8% MoM in December 2013 and fell by only 0.1% vs. the US Dollar in January 2014) which lowers risk of imported inflation.
…and June 2014 interest rate call revised down in tandem
Eyeing lower-than-earlier-anticipated inflation (both headline and core), we also lower our discount rate / interest rate outlook for FY14E where our revised June 2014 discount rate outlook stands at 10.5% (+50bp from current levels) vs. our earlier call of 11.0%. While it may be argued that lower CPI makes a case for no further rate hikes this fiscal year, we believe that (1) State Bank of Pakistan (SBP) is likely to adhere to targeting positive real interest rates, where our FY14E closing CPI outlook is 9.9% vs. current discount rate of 10.0% and (2) given the still-weak SBP foreign exchange reserves position, IMF is likely to keep a stern eye on the central bank’s policy rate stance. We also flag somewhat conflicting signals given by last week’s PIB auction, where the government lifted Rs199bn vs. a target of Rs60bn, setting 10-year PIB cut-off at 12.89%. While banks’ willingness to participate reflected their view of no further discount rate hikes, the government’s acceptance of such a high percentage of bids has once again left the market on the fence regarding future interest rate hikes.
