Another 50bps rate-cut by SBP on the cards?


Whereas some quarters are critical of the central bank for slashing the discount rate by 1.5 per cent in one go saying the move might lead to further escalation in the already double-digit inflation, some analysts believe the regulator is expected to cut the policy rate in view of the easing inflationary pressures in the country. The analysts view that the backbreaking consumer inflation in the poverty-stricken country was expected to come down to 10 per cent by the end of this month.
Given this downward trend in inflation, the analysts see another 50 basis points rate-cut by the State Bank in its monetary policy decision to be announced at the end of November, for the months of December and January. “The downward trend in the inflationary pressure is expected to create further room for the central bank to continue the process of monetary easing in the next monetary policy statement (MPS) due towards the end of November,” viewed Nauman Khan of Topline Securities. The analyst said the much-awaited Consumer Price Index (CPI) inflation number for the month of October was expected to be released next week, which was likely to fall in the range of 10 to 10.3 per cent as against 10.5 per cent for September. Thus, he said, this would be the third consecutive monthly decline which would render into 4MFY12 average inflation to 11.2 per cent as compared to 13.9 per cent in the same period last year. Khan said the increase in the regulated prices of electricity and petrol during the month of October on account of rise in the international oil prices, and its indirect implications on the revised CPI basket could keep the October month-on-month (MoM) inflation downward sticky.
While on the other hand, relative stability in food prices particularly that in perishable items, as Ramadan and Sindh floods effects fade away, would somewhat soften the impact of inflationary pressure generated by the two aforementioned factors. “Overall we estimate October MoM inflation to clock between 0.6 and 0.8 per cent, compared to 1.0 per cent MoM in September,” the analyst said. He said with last year’s high base effect, the MoM inflation number was expected to translate into YoY inflation of 10 to 10.3 per cent, which will be the lowest since February 2010, under the revised CPI basket. The basket was revised in September on the basis of House Expenditure Survey conducted in 2007-08 and rebased to July 2008. “Furthermore, we expect 4MFY12 average inflation to be around 11.2 per cent as against 13.9 per cent in the same period last year”. About the full year inflation, the analyst said with high base affect phenomena expected to keep inflationary numbers subdued, at least till February 2012, the average FY12 inflation was estimated to stand between 11.5 to 12 per cent. The number is slightly lower than the expectation of the government and the central bank.
“Therefore, with present inflationary trend falling in the acceptable range and real interest rate still in the positive zone, we expect another round of monetary easing of 50bps in the November MPS,” Khan said. The analyst further added that major risk to his assessment came from fragility of the country’s external account and its impact on the rupee-dollar parity, stemming from firm oil prices, higher kerb premium adversely impacting workers’ remittances and export receipts and expected pressure on financial flows in the absence of IMF’s Letter of Comfort.