AKD Quotidian about — CPI to remain soft in Dec’12

Karachi, December 27, 2012 (PPI-OT): CPI has been on a consistent downtrend since Jul’12, clocking in at the lowest level in 5yrs in Nov’12 (6.9%YoY).

According to AKD Securities now expects CPI to depict a modest 0.08%MoM increase (SPI suggests a 0.11%MoM increase) which will lead Dec’12 CPI to clock in at 7.77%YoY. This will lead to 1HFY13 CPI to average 8.3%YoY, comfortably below the GoP’s FY13 inflation target of 9.5%YoY and vindicating the monetary easing cycle despite BoP risks. Going forward, AKD Securities expects the high base effect to keep CPI in single digits (YoY) in 2HFY13. That said, fiscal deficiencies may impinge on the monetary policy where GoP borrowing is leading M2 growth (14%YoY). Considering power sector subsidies earmarked for full-year FY13 have already been utilized in 5MFY13, GoP borrowing is likely to continue unabated across the next 6 months. With a return to IMF a possibility and the money market believing the rate cut cycle to have ended (yesterday’s T-bill auction saw bids concentrated in the 3M tenor), AKD Securities believes soft CPI readings may become irrelevant for upcoming monetary policies particularly if the PKR depicts weakness.

Dec’12 CPI Preview: After registering at a 5yr low in Nov’12, AKD Securities expects CPI for Dec’12 to clock in at 7.77%YoY, implying a 0.08%MoM increase (SPI suggests a 0.1 1%MoM increase). This would bring 1HFY13 CPI to 8.3%YoY vs. 10.9%YoY in the same period last year. Soft CPI readings are reflective of subdued food inflation – while wheat support prices (which holds a 4.6% weight in CPI basket) have been increased, prices were already higher at the retail level, leaving little inflationary impact going forward.

Outlook: AKD Securities expects the high base effect to keep YoY CPI entrenched in the single digits across the next 6 months. Although this provides room for further rate cuts (real interest rates are still positive), AKD Securities believes the monetary easing cycle (DR cut by 450bps since Jul’11) is at an end. In this regard, GoP borrowing from the banking system (PKR 545 billion FYTD) is likely to augment considering earmarked power sector subsidies for full-year FY13 (PKR 170 billion) have already been utilized. Moreover, yesterday’s T-bill auction saw bids rejected with Banks eyeing higher rates and concentrating their bids in the 3M tenor, signaling expectations of a rate hike before too long. As such, AKD Securities believes soft CPI readings going forward may become irrelevant for upcoming monetary policies particularly if the PKR depicts fresh weakness.