By: Global Securities Pakistan Limited
Pakistan Economy: We estimate CPI inflation for Nov15 to register at 2.87% YoY compared to 1.61% YoY for Oct15. On a MoM basis, inflation is expected to rise by 0.73% during Nov15 against 0.49% during Oct15. Key contributor towards a likely acceleration in inflation is higher food prices, which are estimated to go up by 1.64% MoM. Consequently, 5mo FY16 average CPI inflation will likely record at 1.87% compared with 6.47% recorded during the same period last year.
Inflation to pick pace for remainder of FY16: Inflation has remained depressed for CY15 on account of subdued food and fuel prices. Going forward, we anticipate inflation to pick up significant pace on account of: 1) phasing out of a higher base effect, 2) pick up in food inflation and 3) the recent PKR depreciation. Moreover, a recovery in international crude may also accelerate inflationary pressures. The higher base effect will wear off by Dec15, during which we anticipate inflation to reach 4.5%. Furthermore, we expect avg. inflation for FY16 to touch ~4%, in-line with SBP forecasts.
Interest Rate Outlook: Pakistan’s interest rates are currently at rock-bottom levels of 6.5% (TR: 6.0%) in view of subdued inflation, SBP’s key proxy for setting discount rates. With inflation levels expected to recover, SBP will likely maintain current interest rate levels for FY16. Furthermore, we believe SBP may opt for a monetary tightening scenario at the start of FY17, during which we expect inflation to average between 5.5% and 6.0%. Moreover, a potential recovery in international crude prices may stir up inflation and could force the SBP to adopt a monetary tightening stance at a faster pace.