By: Syed Faizan Ahmed
Shajar Capital Pakistan (Private) Limited
The State Bank of Pakistan (SBP) is all set to announce the Monetary Policy Statement (MPS) for the next two months on Nov 15’14.
On inflation barometer, a rate cut is justified keeping in view the latest inflation index (CPI) numbers and prevailing real interest corridors.
However, in our view, other things such as i) IMF board’s approval for disbursement of US$1.1bn combined tranches and ii) little concrete development on reserve positions, may induce SBP to opt for wait-and-see approach in the Nov’14 MPS.
Going forward, placing a high contingency on materialization of US$ inflows from Sukuk and IMF disbursement, alongwith any privatization flows of HBL and ABL (probable in 3QFY15) might make a case for DR’s downward revision by the central bank in Jan’15 MPS, in our view.
Lower inflation reading provides a room for DR revision According to the latest numbers released by the PBS, the country’s CPI during the 4MFY15 dipped to as low as 7.09% against 8.32% in the corresponding period last year. The real interest rate corridor has widened to 2.9% against a 5‐year historical average of ~1.4%. Due to the recent significant reduction in the prices of petroleum products, the inflation reading for the upcoming month of Nov’14 also makes a case of low inflation (Nov’14 CPI to stay below 5%). However, the inflation reading is expected to pick up in the 2HFY15. Subsequently, the average inflation for FY15 is to stay below 8% in our view.