AKD Quotidian about — Soft inflation may not revive easing

Karachi, May 03, 2013 (PPI-OT): CPI forApr’13 has clocked in at 5.8%YoYvs. 6.6%YoY in the previous month. At the same time, Core (trimmed mean) inflation has dropped to 7.6%YoY vs. 8.4%YoY in Apr’13.

According to AKD Securities this brings 1OMFY13 CPI average to 7.8%VoY. However, CPI is up 1.1%MoM where the sequential uptick is largely due to higher food inflation (I-1.5%M0M) and the impact of house rent in the first month of the quarter. Going forward, while AKD Securities expects full-year FY13 CPI to clock in at -8%YoY, AKD Securities does not concur that the latest round of inflation data paves the way for a rate cut.

In this regard, AKD Securities expects headline CPI to return to double digits in FY14 as the base effects unwinds, particularly if the PkRJUS$ parity weakens on BoP concerns amidst continued fiscal profligacy (FY13 fiscal deficit expected at -8% of GDP). In addition, AKD Securities flags Pakistan’s likely reentry into an IMF program within the backdrop of the Fund’s estimates that the PkR(US$ parity is overvalued by at least 5%.

AKD Securities furthers take AKD Securities cue from IMF’s recent statement for Sri Lanka (Apr’13 CPI at 6.4%YoY vs. DR benchmark lending rate at 9.5%) to abstain from any rate cuts given risk of rising inflation, low revenue collection and high debt-to-GDR In sum, AKD Securities retains views that the monetary easing cycle is over.

CPI Review: Apr’13 CPI clocked in at 5.8%YoY, translating into a 1.1 %MoM increase. As a result, 1 OMFY1 3 CPI has averaged 7.8%YoY, comfortably below the GoP’s FY13 target of 9.5%YoY. Uptick in sequential CPI is largely due to 1) 13.O%MoM increase in perishable food items and 2) the impact of house rent during the first month of the quarter. Importantly, Core (Trimmed Mean) CR1 which AKD Securities understands is targeted by the SBP, softened to 76%YoY in Apr’13 compared to 8.4%YoY in Mar’13, bringing its 1OMFY13 average to 9.5%YoY.

Inflation Outlook: While prospects for incremental price pressures remain (increase in electricity tariffs; sequential uptick pre-Ramadan), the high base coupled with lower fuel prices should still lead full-year FY13 CR1 to average -8%YoY. That said, AKD Securities expects headline CPI to return to double digits in FY14 as the base effects unwinds, particularly if the PkR/US$ parity weakens on SoP concerns air iidst continued fiscal profligacy (FY13 fiscal deficit expected at -8% of GDP).

Interest Rate Outlook: Although the latest round of inflation data has led to emergent calls for a further cut in the Discount Rate, AKD Securities believes the SBP will continue to err on the side of caution and keep rates unchanged in the next MPS.

This is based on 1) anticipated uptick in inflationary pressures beyond the immediate tenri and 2) likely re-entry into an IMF program. Regarding the latter, AKD Securities highlights IMPS recent statement for Sri Lanka (Apr’13 CR1 at 64%YoY vs. DR benchmark lending rate at 9.5%) to abstain from any rate cuts given risk of rising inflation, low revenue collection, low public investment and high debt-to-GDP ratio at 80%.

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