By: Arif Habib Limited
SBP cuts Policy Rate by 50bps, backed by soft inflation/broad money contraction: The SBP, in its latest Monetary Policy Statement (MPS), decided to slash the policy rate by 50 basis points, taking the central bank’s policy rate from 6.5% to 6.0%, in line with our expectations, however; majority analysts viewed SBP to maintain status quo. Moreover, the Reverse Repo (ceiling) and Repo rates have been effectively set at 6.5% and 4.5%, respectively. As per SBP, the rationale behind the cut circled around the following reasons, namely (i) soft inflation reading in trailing 12 months (3.6% YoY) and a weak outlook of 4.5-5.5%, compared to 6% initial target for FY16, (ii) stable external account, despite falling exports, as lower oil prices and higher remittances flow helped reduce the CAD, and (iii) tightening money supply (due to government borrowing retirement through SBP) and seasonal factors (Eid).
Key risks to CPI outlook include subsidy cuts and weak global commodity outlook: Key upside risks identified to the CPI estimates for FY16 included (i) subsidy cuts and tariff increases in electricity and (ii) lower food prices in global markets leading to possible reductions in domestic supply, while a low probability of recovery in global commodity (and particularly in crude oil prices) was cited as a possible downside risk to CPI estimates. <With our view of soft crude oil prices in the short term (USD 50/bbl, using Brent crude), our CPI estimate 5.0% for FY16 falls within the CB’s estimated range.>
A welcome boost for the equity market: For equity markets, the latest SBP chop comes as a welcome boost, given the volatility seen in Sep-15 due to uncertainty in regional markets. We believe this cut should help the KSE100 regain its lost vigor through improved fundamentals and higher corporate earnings, particularly for companies with high leverage positions. Moreover, the rate cut has further increased the disparity between asset classes, with equities clearly being the outright winner. We expect an uptick in momentum going forward, flagging this as a good time to go long in Fertilizers, Cements and IPPs (details follow).