By: Sarah Mazher
KASB Securities Limited
+92 21 111 222 000
Weekly SPI indicates softer food inflation in Aug-14, potentially resulting in CPI falling to expected 7% in Aug-14 vs 7.9% in Jul-14.
Food inflation estimate remains a key swing factor, while delay in power tariff hike, no increase in house rent and unchanged POL prices should help ease CPI.
As per last MPS meeting minutes, a slow progress on conducive factors of growth (other than lower interest rates) – mainly law and order situation and energy reforms – remained key sticking points that kept central bank board members who supported monetary easing from strengthening their case.
As a result we believe political resolution will remain crucial for State Bank’s decision to ease monetary policy, given overall macro implications of a long drawn-out impasse including risk to economic growth agenda.
Risks to our call – in case of delays in (1) completion of 4th IMF review, (2) govt meeting IMF’s conditions, or (3) resolution of ongoing political tension, the SBP may be prompted to adopt a wait and see stance in Sep-14 MPS.
CPI inflation likely to dip to 7%
CPI inflation is expected to dip to 7% in Aug‐14 from 7.9% in Jul‐14 on the back of (1) softer food inflation, (2) no increase in house rent for this month, (3) delays in power tariff hike, and (4) unchanged petroleum prices.
Weekly SPI figures point to benign food inflation: Prices of some of perishable food items have declined to normalized levels, while others have increased by a smaller magnitude compared to what was witnessed during the month of Ramadan (Jul‐14).
House rent increases on quarterly basis only; August is safe: Absence of house rent increase in Aug‐14 should also help ease CPI during the month. Recall that house rent increases are based on quarterly surveys, and remain flat during remaining months.
Power tariff hike delayed due to political impasse: IMF has reportedly set pre‐condition for release of fourth tranche of loan, to increase power tariff by 4‐5%. Although slab‐wise details are not available, an increase of 5% in average power tariff has a direct CPI impact of ~0.3% for the month, as the CPI weightage of average power tariff is 4.4%.
POL prices unchanged for second consecutive month: The govt has held off any increase in petrol/HSD price since May‐14, by reducing petroleum levy to currently PRs8.13/litre and PRs7.47/litre from PRs10/litre and PRs8/litre respectively in May‐14.