Adam Securities Limited – CPI Forecast

Karachi, October 30, 2015 (PPI-OT): Declining T-Bills Yield and Ballooning RIR hinting further easing on the way

Pakistan headline inflation clocked in at 1.32% Y/Y during the month of September as compared to 1.72% Y/Y in the previous month, decreased on the back of lower food prices (weight of 34.83% in overall consumer price index). Lower oil prices has also helped CPI to fall as transportation cost dipped by 14.38% Y/Y. Going forward, expected recovery in international oil market and reduction in subsidy on electricity (As per IMF) may provide little push to CPI.

Adam Securities Limited expects CPI for the month of October likely to clock in at 1.65% Y/Y, while average CPI to stand at 1.62% Y/Y for 4MFY16 as compare to 7.09% Y/Y in same period last year. Adam Securities Limited attributes the expected little upward movement in inflation to i) higher prices of wheat and allied products, pulses and fresh vegetables etc ii) scheduled upward revision in House Rent Index having 29.4% weight in CPI basket iii) Devaluation of PKR against $.

Following are the forces likely to drive the CPI going forward:

1) Movement of Oil prices in international market.

2) Fuel adjustment and structural issues impact.

3) PKR/Dollar parity.


With an improvement in macro-economic indicators Adam Securities Limited expects Inflationary pressure during FY16 to remain muted courtesy to favourable base effect and bearish outlook of global commodity prices. Since August 2014 global food prices dropped by 14% reported by World Bank, following a deep decline in Energy prices amid weakening global demand from giant energy consumer like China, US, Japan, EU which has created oil supply glut. On domestic front, recent currency depreciation coupled with expected increase in Petroleum prices (Nov’15) will likely to exert inflationary pressure during the period.

T-Bill Yields declined, hinting further easing on the way

Yields reduced on latest T Bill auction, indicating market expectation about further monetary easing. SBP sold Market Treasury Bills (MTBs) worth Rs207.44 billion with yields further reduced in Wednesday’s auction.

Swelling RIR has created ample room for quant easing

Currently, real interest rate is clocking at +439bps (DR: 6%, 3MFY16 average inflation: 1.61%) and expected lower commodity prices to keep inflation in check. Keeping above scenario in perspective, Adam Securities Limited believes SBP has ample room to pursue further monetary easing in order to spur economic activity. However, potential liftoff in petroleum prices, devaluation of PKR against US$ and possible supply disruption due to earthquake may exert inflationary pressure, going forward. Thus, Adam Securities Limited expects SBP may opt wait-and-see approach in upcoming MPS (Nov’15) before eventually deciding on further monetary easing.