By: Arif Habib Limited
MPS Review: State Bank of Pakistan (SBP), as per our expectation, opted to wait and watch the impact of its last rate cut (Sep’15) for another two months, and decided to maintain Policy Rate at 6.0% in its November 2015 Monetary Policy Statement, last Saturday 21st of Nov’15. The rationale for status quo circled around: (i) expected pickup in headline inflation, (ii) improved external sector outlook, and (iii) expected continued uptake in private sector credit cycle, along with an improving LSM growth.
Upward projection of Headline Inflation: The subdued global oil prices along with other major commodities may continue to dictate annual average inflation at lower levels (our FY16 estimate of 4.3%), however, the headline inflation is expected to pick up from current levels mainly due to low base effect. Key risks to our inflation thesis remain expected recovery in oil prices and rising commodities prices.
Nominal Increase in Private Sector Credit coupled with LSM growth: Private Sector credit noted a growth of 0.49% for 10MCY15, compared to a decline of 0.12% in 9MCY15, showing signs of entering an uptake phase of the credit cycle. Large Scale Manufacturing (LSM), on the other hand, showed a growth of 3.9% YoY in 3MFY16, compared to only 2.6% SPLY. Further boost to this growth is expected from expansion in construction activities, automobile production, and improving energy supply on the back of recent LNG imports and various energy projects in the pipeline.