By: Habib Metropolitan Financial Services Limited
Pakistan Economy: The central bank is scheduled to announce the monetary policy on November 21, 2015 whereby despite of a steady real interest rate a DR cut seems unlikely. A multi‐year low headline inflation has prompted the central bank to keep a heavy paddle on its monetary easing stance. After having slashed the policy rate by 280bps on a CYTD basis and 50bps during FY16, the possibility of further easing is remote. The primary reasons for our DR outlook stems from 1) A likely rebound in inflation in the near term as base effect bias is erased, 2) Failure of monetary easing to translate into credit offtake and a 3) Soft demand outlook which has kept aggregate demand under check.
Inflation: Likely To Pick Pace From 2HFY16: The headline inflation for the month of Oct’15 settled at 1.61% Y/Y, while that for 4MFY16 also stood at 1.61%. We do not expect the full year inflation reading for FY16 to march beyond 4% Y/Y, thereby implying an overall softer outlook. Erosion of the base effect bias and revision in House Rent Index is likely to push inflation in the upcoming months. We expect the central bank will accord a sizeable weight‐age to this factor and may tilt in fa‐ vor of keeping rates unchanged. Furthermore the inflationary pressures fueled on account of recent PKR depreciation and an imminent increase in gas tariffs from 2HFY16 will also play their part in keeping inflation bloated.