By: Shajar Capital Private Limited
Economy: Policy Rate; We consider that the probability of a cut in policy rate is unlikely with a rebound in inflationary levels due to low base effect and resultant depreciating impact on PkR/US$ parity. The recent developments suggests average inflation to be in the vicinity 5%-5.5% in the 2HFY16.
To recall, the State Bank of Pakistan (SBP) slashed target rate by 50bps to 6% and discount rate to 6.5% vs. 7% previously.
On currency front, PkR against US$ depreciated by 4.5% before the SBP intervention that made the rate revert to PkR105.5 vs. US$. With Fed rate hike expected in Dec’15, we do not foresee SBP to adopt an aggressive stance by reducing “Policy rate” that may result in dollar outflow and exert further pressure on currency.
In the meantime, yields on longer term bonds in the PIB Auction yesterday declined marginally by average 20bps suggesting market’s expectation of a “Status Quo”.
We estimate Nov’15 inflationary reading to clock in between 2.6-2.9%YoY leading 5MFY16 average inflation to be around 1.89% vs. 6.45% recorded in the CPLY. Going forward, our calculation suggests 1HFY16 average inflation to remain <2.5% where full year inflation is forecasted to remain under 4%.