The Federal Bureau of Statistics (FBS) is expected to release price indices for the month of Oct’11 in the upcoming week, in which Consumer Price Index (CPI) based inflation for the month is expected to clock in at 10.2 per cent YoY lower than Sept’11 figure of 10.5 per cent. This translates into a sequential MoM uptick of 0.7 per cent against 1.03 per cent previous month.
The Sensitive Price Index (SPI) scooped up 30ppts MoM for the month to 6.33 per cent YoY (4-weekly average), but is likely to pick up sharply in the months ahead. The monthly rise we believe is primarily driven by pre-seasonal demand (Eid-u-Adha), while a YoY price fall was largely anticipated, owing to high base effect from previous year, said Saad Khan at AHL. On going, we think the CPI inflation for the month of Nov’11 is likely to fall sharply which will bring 2QFY12 headline inflation fewer than 10.5 per cent YoY, he added. Further to this note the MoM headline inflation for the full year FY12, is expected to register a 1.07 per cent on average against 1.05 per cent in FY11. Keeping in mind, this is based on 12 per cent YoY target foreseen by State Bank of Pakistan (SBP), he added.
Implications for future MPC
SBP is expected to keep discount rates on hold until 3QFY12, at 12.0 per cent and would allow a gradual fall by another 100-50bps by 4QFY12 at 11-11.5 per cent by fiscal year end. Currently the 1QFY12 the real interest rate adjusted of headline inflation stand at +52ppts. During the acting Governor Yaseen Anwer’s tenure, the descending price indices trend allowed the Monetary Policy Committee (MPC) to slash the rate by 2 per cent. Therefore at current rate a decrease in the real interest rate starting from Feb’12 may well allow private investment spending to pick up. While on the question of medium-long term price stability the MPC showed its concerns stating “[medium-term] risks largely stem from persistence of government borrowing from scheduled banks, exchange rate depreciation, and likely upward adjustments in the administered prices of energy”. This in our view will finally allow MPC to reconsider its easing cycling as soon as 2QFY13, he added.