The economic observers expect the central bank to keep the discount rate intact at 9.5 percent for next couple of months despite foreseeing the Consumer Price Index (CPI) inflation for March clocking in at 6.75% YoY rise, 68-month low, compared to 7.38% YoY recorded in February.
On MoM basis, 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%. 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 our view, is attributable to rising government borrowing for budgetary purposes, which to date stands at Rs 766 billion (Rs 7,109bn in stock), “said a report issued Tuesday by Arif Habib Research. Furthermore, it said, 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).
“Although easing inflationary concerns have aided in the easing cycle (Dec’12 MPS), we think 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%),” the report said.
However, commodity price (in particular that of crude oil) has not yet posed major risk to inflationary pressures in FY13TD, in our view. But, a further rate easing will likely cause a sharp PKR depreciation, thus paving way for imported inflationary impacts, going forward. The report said the SBP was expected to keep the discount rates on hold in the upcoming Apr-13 monetary policy, at 9.5%. While looking ahead, the SBP’s forecasts for inflation look similar to ours as well as the street consensus. However, beyond FY13, our 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 our opinion a rate easing in the following month’s policy would be more of a surprise, though room does exist.
