Morning Call about – CPI expected at 6.75% YoY in Mar’13 – Arif Habib Limited

Karachi, March 26, 2013 (PPI-OT): CPI is expected to register a YoY rise of 6.75% for Mar’13 Arif Habib Limited expects Consumer Price Index (CPI) based inflation for the month of Mar’13 to clock in at 6.75% YoY rise (68-month low) compared to 7.38% YoY recorded in Feb’13.

According to Arif Habib Limited on a MoM basis, Arif Habib Limited expects the CPI to register an increase of 0.77% compared to a decline of 0.3% observed during Feb’13. With the Mar’13 inflation remaining in single-digit, the average inflation of 9MFY13 should further be lower at 8%.

Not only was it due to inflated food prices…
The NFNE core inflation has been continuously hovering near double-digit since Nov’12, averaging ~10.2% YoY in 8MFY13. Excluding food and energy price this rise, in Arif Habib Limited views, is attributable to rising gov’t borrowing for budgetary purposes, which to date stands at PKR 766bn (~PKR 7,109bn in stock). Furthermore, potentially higher imported inflation as well as a substantial rise in public sector borrowing requirements will result in persistent inflationary pressure in 2HCY13. So far the current level of inflation has not been driven by the food factor single- handedly. Fluctuating energy prices have also resulted in inflationary pressures domestically. However, in Mar’13 particularly, the food inflation (~0.94% MoM) is expected to have contributed to the overall headline inflation along with expected increase in clothing and footwear (0.9% MoM).

Highlighting the currency slide
Although easing inflationary concerns have aided in the easing cycle (Dec’12 MPS), Arif Habib Limited thinks SBP’s focus will remain shifted towards containing upside risks to inflation from both supply and demand-side factors, going forward, along with depreciating currency (FY13TD 3.8%). However, commodity price (in particular that of crude oil) has not yet posed major risk to inflationary pressures in FY13TD, in Arif Habib Limited views. But, a further rate easing will likely cause a sharp PKR depreciation, thus paving way for imported inflationary impacts, going forward.

Implications for future monetary policy
Arif Habib Limited expects the SBP to keep discount rates on hold in the upcoming Apr-13 monetary policy, at 9.5%. While looking ahead, SBP’s forecasts for inflation look similar to ours as well as the street consensus. However, beyond FY13, Arif Habib Limited forecasts for inflation are considerably higher (~10% YoY E) and so do SBP’s recent talk-terms, suggesting indications for higher inflation in 1HFY14. Thus, in Arif Habib Limited opinions a rate easing in the following month’s policy would be more of a surprise, though room does exist!

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