Morning Call about – CPI to average ~7.5% in FY13, room for a rate cut in sight – Arif Habib Limited

Karachi, May 03, 2013 (PPI-OT): CPI up 5.80% YoY in Apr ’13, marks 1.1% MoM rise Inflation for the month of April 2013 touched 9-year low clocking in at 5.8% YoY.

According to Arif Habib Limited this, however, marks a 1.1% MoM rise in the overall inflation. Prior month saw CPI going down to 6.57% but Apr’13 inflation breached that 66-month low level reached in Mar’13. With this, the average inflation now stands at 7.75% for 10MFY13 strengthening forecast of below 8% for FY13 against 9.5% targeted.

Reasons for higher monthly inflation
As identified in Arif Habib Limited previews, Arif Habib Limited foresaw monthly rise in prices of Food, Clothing and Footwear as well as House Rent categories. The data released by PBS shows that, on a monthly basis, these categories rose by 12.98% (perishable items), 1.58% and 1.07%, respectively. Moreover, recreational and education categories too marked 2.92% and 2.52% MoM, respectively.

Much expected was a monthly rise in the ‘core’ inflation that went up by 1.1% MoM. This increase can be attributed to higher government borrowing that has reached up to PKR 827bn by the end of Apr’13. Having said that, Arif Habib Limited saws the core inflation remaining low on YoY basis at 8.7% compared to last month’s 9%.

Future expectations on inflation and monetary policy stance
No doubt the inflation has been within the controllable and expected range so far, thanks to largely unchanged energy prices backlog that the caretaker setup has a freeze put on. Arif Habib Limited sees CPI remaining within the range of 7.5-8.0% by the end of FY13.

However, Arif Habib Limited stills expect SBP to maintain its cautious stance in the monetary policy coming in Jun’13. Thus, discount rate is expected to remain at 9.5% by the end of the current fiscal year.

Although Arif Habib Limited does not negate possibility of a token cut as Arif Habib Limited calculators suggest further decline in inflation in the next month thus, making ample room for SBP to go for a cut. But Arif Habib Limited expects SBP to keep a cautious stance on the grounds of concerns hovering the external account and negative fiscal indicators alongside IMF’s vigilance before another loan program becomes effective.

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