By: Topline Securities Limited
Pakistan Monetary Policy: In its latest monetary policy announcement (MPS), Pakistan’s central bank (SBP) has slashed policy rate (target rate) by 50bps to multi-decade low of 6%. SBP has also lowered the ceiling rate (reverse repo) and floor rate (repo rate) by 50bps to 6.5% and 4.5%, respectively. Thus, minimum deposit rate (MDR) on saving and fixed deposits will now decline to 4% from 4.5% which is set 50bps below the SBP floor rate.
Width of interest rate corridor (difference between the ceiling rate and floor rate) has been maintained at 2%.
SBP has attributed the revision in policy rates to deceleration in inflation and overall improvement in Pakistan macros.
CPI inflation in Aug 2015 slowed down to 1.7% as against 7% in Aug 2014. External account of the country has also showed strong performance as foreign reserves are at all time high of US$18.5bn. Further inflows from issuance of Sukkuk and IMF tranches are also expected in FY16. Macroeconomic stability and improvement in security situation of the country has also improved the prospects of foreign direct investment in Pakistan, according to SBP.
We now anticipate CPI inflation to clock in at ~5% in FY16 in line with SBP estimate of 4.5%-5.5% (Govt. target of 6%). Declining commodity prices and smooth supply of perishable food items are likely to keep inflation in check, we believe.