August 2014 heralded a 14-month low inflation reading, where overall CPI inflation clocked in at 6.99% YoY vis-à-vis market’s expectation of ~7.3% YoY.- On a sequential basis, inflation edged up by 0.3% MoM vs. 1.7% MoM rise in July 2014 and 0.6% 12-month trailing average.
- With (1) soft YTD inflation reading of 7.44% YoY and (2) Real Interest Rate of ~2.5% vs. Pakistan’s 10-year average Real Interest Rate of ~1.5%, we expect State Bank of Pakistan (SBP) to strongly consider a 50-100bp cut in Discount Rate (DR) in the upcoming MPS in September 2014.
- That said current political crisis could potentially hold back SBP from a cut in Discount Rate with (1) PKR feeling the heat (down 2.5% over last 15 days), (2) potential fiscal slippages from lower tax collections and (3) holdups in the privatization program.
August inflation clocks in at 6.99% YoY
August 2014 heralded below-expected 14-month low inflation reading. Pakistan Bureau of Statistics (PBS) yesterday released August 2014 inflation statistics, where overall CPI inflation clocked in at 6.99% YoY (vs. 7.9% YoY in July 2014) vis-à-vis market’s expectation of ~7.3% YoY. Soft YoY inflation reading was led by limited rise of 4.65% YoY in heavyweight Food Category. That said, increase in (1) House Rent Index, (2) electricity prices and (3) education costs contributed towards inflationary pressures during the month. On a sequential basis, inflation edged up by 0.3% MoM vs. 1.7% MoM rise in July 2014 and 0.6% 12-month trailing average; where soft inflation number was led by benign food inflation (1.79% MoM decline in Perishable Food Items).
Strong case for cut in DR; politics could hold back SBP
With (1) soft YTD inflation reading of 7.44% YoY (vs. FY15F inflation outlook of 8% YoY) and (2) Real Interest Rate of ~2.5% vs. Pakistan’s 10-year average Real Interest Rate of ~1.5%, we expect State Bank of Pakistan (SBP) to strongly consider a 50-100bp cut in Discount rate in the upcoming Monetary Policy Statement (MPS) in September 2014. That said current political crisis could potentially hold back SBP from a cut in Discount Rate. We believe Pak macros could suffer from current political deadlock given high chances of (1) fiscal slippages from lower tax collections amid Civil disobedience call from a protesting political party and (2) holdups in the privatization program. Meanwhile, Pakistan and IMF talks too have failed to reach a conclusion, while PKR vis-à-vis USD is down by 2.5% over the last 15 days.
