By: JS Global Capital Limited
Pakistan Economy: Higher food prices leads uptick in May CPI; CPI inflation for May 2015 clocked in at 3.16% YoY (JS estimate: 3.2% YoY) vis-à- vis 2.11% YoY recorded last month, where uptick in inflation reading was led by higher Food Inflation (3.0% vs. 0.0% last month) in the run up to Ramadan. Note that prices of Perishable Foods Items edged up by 4.96% YoY in May vs. -8.46% YoY in April. Core Non-Food-Non-Energy (NFNE) inflation declined to 4.9% YoY (vs. 5.4% YoY in April 2015), while Core Trimmed inflation was recorded at 3.9% YoY for the month. On a MoM basis, CPI inflation increased by 0.8% (vs. 1.3% in April 2015 and preceding 6-month average of -0.1%) driven by uptick in Food inflation (+1.8% MoM), where prices of Perishable Food Items increased by 9.7% MoM.
YTD FY15 headline inflation averages at 4.65% YoY: Overall in 11MFY15, CPI inflation stands at a modest 4.65% YoY as compared to 8.66% YoY in the corresponding period last year (down 401bps), while core inflation slid down at a relatively slower pace to 6.8% YoY in 11MFY15 from 8.3% YoY in 11MFY14 (down 153bps).
Further cut in policy rate unlikely: We expect FY15E to close out with CPI averaging 4.6% for the year, while we eye 6.0-6.5% CPI inflation in FY16F. We eye upside risk to our FY16F estimate from (1) higher gas tariffs, (2) unexpected sharp increase in international oil prices and (3) higher-than-expected inflationary impact of taxation measures expected in the upcoming budget. Hence we expect the latest rate cut by the State Bank of Pakistan (SBP) in the policy rate to be last in the current monetary easing cycle, where Real Interest Rates have effectively fallen down to ~300bps vs. its 10-year historical average of ~300bps.