Karachi, June 29, 2012 (PPI-OT): While SPI data suggests a hefty 2.9%MoM increase in Jun’12, AKD Securities believes this incorporates a tag impact (SPI was -ive 0.1% in May’12 while CPI was up 1.1%MoM). In this regard, the 0.73%MoM increase in the “Housing, Water, Electricity, Gas and Fuels” category may serve to explain the disconnect between SPI and CPI last month – power tariffs were raised by PkR1.25/unit or 16% effective May 16’12 – likely captured in CPI but coming in too late for SPI. Accordingly, AKD Securities expects Jun’12 CPI to clock in at 12.61%YoY/1.24%MoM. This will bring the FY12 CPI average to 11.24%YoY, comfortably within the SBP’s announced range of 11%-12%. That said, CPI will now have exceeded the benchmark Discount Rate in consecutive months. Coupled with chronic fiscal deficiencies and consistent pressure on the PkR in the face of declining fx reserves, AKD Securities expects the SBP to take a more hawkish stance going forward. As such, the SBP may now choose to ignore continued sluggish GDP growth and lack of fresh private sector credit off take – reasons it cited for cutting the DR by 200bps during FY12.
Inflation and Monetary Policy: AKD Securities expects Jun’12 CPI to clock in at 1261%YoY/1.24%MoM. While FY12 average CPI will clock in below the DR at 12%, CPI will have exceeded the DR for each of the last two months. If price pressures persist into FY13, the SBP will likely be pressed to adopt a more hawkish stance going forward even as GDP growth trajectory remains below-par and private sector crowding out continues unabated. In this regard, the SBP is likely to be influenced by pressures on the PkR/US$ parity (depreciation of 5%CYTD) in the face of declining fx reserves. Moreover, despite growth considerations, the region may also start monetary tightening – Bangladesh and Sri Lanka have both raised rates this year while India’s Reserve Bank has recently stated that Indian inflation exceeds acceptable levels. Unique to Pakistan, potential re-entry into another IMF program in 2013 leads us to believe interest rates are now poised to rise, potentially as early as the next Monetary Policy Statement scheduled for the start of Aug’12.