By: Arif Habib Limited
Monetary Policy Preview: State Bank of Pakistan (SBP) is set to announce its November 2015 Monetary Policy Statement this coming Saturday, 21- Nov’15. We expect the central bank to maintain status quo at the current 6.5%. Our call is premised on (1) uptick in CPI inflation, and (2) pickup in private sector credit.
Expected Inflation growth pickup backed by low base: Although, the decline in global crude oil prices provided some relief to the economy, with CPI inflation clocking in at 4.6% for FY15 (FY14: 8.6%). Moreover, sluggish oil prices continued to dictate CPI readings during 4MFY16, averaging 1.6%YoY. However, we expect inflation numbers to pick up from current levels, due to (i) bottoming out of oil prices, with minor reversals expected from 2HFY16, (ii) low base effect, and (iii) increase in food inflation as witnessed in the weekly SPI of key food items. This expected uptick in inflation should help taper off Real Interest Rate (RIR) from current high of 4.9% (Oct’15) to 4.0% in Nov’15, and 2.5% in Dec’15 with DR at 6.5%, based on our estimates.
Increase in private sector credit finally beginning to show: In order to boost economic growth amidst receding inflation, SBP has already slashed 350bps off of DR bringing down the rate to 6.5% (Sep’15) from 10% in (Nov’14). Up until Sep’15 MP rate cut of 50bps, the private sector credit had receded by -0.12% (9MCY15), whereas, since then a slight uptick of +0.6% (Oct’15) has been noticed. Similarly, a pickup in loan growth by scheduled banks was witnessed in Oct’15 at 1.7% bringing the 10MCY15 advances growth to 4.2%. Although, the results have been less convincing than expected, we believe, the real impact of last Policy rate cut is yet to show. Furthermore, as per Finance Minister’s recent statement, SBP has been asked to introduce more aggressive measures such as mandatory financing to SME sector, which may provide an additional push to private sector growth.
Another Key Consideration: PKR depreciation: PKR has depreciated by 3.9% in 4MFY16, compared to only 2.9% SPLY. The depreciation comes amidst the probability of US Fed rate hike in Dec’15 which will exert further pressure on PKR and other regional currencies. While, considering the slow growth in private sector and high RIRs alone; SBP may have a small window to cut another 50bps, however; we believe, it may be counterproductive with PKR undergoing further depreciation.