Elixir Securities Limited – The Bell

Karachi, February 26, 2016 (PPI-OT): Pakistan Economy – Inflation Preview – Feb 2016

Taking cues from SPI readings where SPI (combined) receded by 1.2% in past six weeks, Elixir Securities Limited expects CPI to print 3.9-4.0% in Feb-16, taking average reading to ~2.5% for 8MFY16 as compared to 5.5% in 8MFY15. On a monthly basis, CPI to contract by 0.32% due to expected deflation in food basket (down 0.7%) and transport segment (down 2.5%). Going forward, Elixir Securities Limited expects inflation to gradually crawl northwards mainly because of low base effect coupled with demand pull inflationary factors. Thus, incorporating a monthly inflation of 0.7%, CPI is likely to hit 3.8%YoY in Jun-16, taking average inflation for FY16 to 3.0-3.2%.

Despite increasing inflation and shrinking avg. real interest rate to 2.55% in the remaining 5MFY16, money market yields hint towards another rate cut in upcoming MPS. However Elixir Securities Limited expects otherwise in the wake of expanding C/A deficits, inflationary pressures in ending months of FY16 due to pre-Ramadan euphoria and consequent pressure on exchange rate in the event of rate cut. Thus Elixir Securities Limited expects SBP should maintain a cautious stance in the absence of clarity on protracted higher RIR going forward.