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AKD Quotidian about — CPI has bottomed but rate cut still on!

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by January 27, 2012 Brokerage

Karachi: SBP has indicated it will wait for Jan’12 inflation data before making its monetary policy decision.

According to AKD Securities, in this regard, AKD Securities believes that CPI has already bottomed and expect it to register at 10.5% in Jan’12 vs. 9.75% in Dec’11. On a sequential basis, AKD Securities expects CPI to increase by 1.9%MoM, in line with the weekly SPI trend (high correlation of 0.75 between CPI and SPI). This is largely due to the gas price increase from Jan 1’12 and spill over effects on the entire CPI basket. Nevertheless, considering 7MFY12 average CPI is expected to clock in at 10.8% (AKD Securities raises full-year CPI estimate to 11.5%), AKD Securities believes the SBP will likely cut the DR by 50bps in the Feb 11’12 MPS.

Money market sentiment appears to support this view where, in the last T-bill auction, the 6m and 12m tenors together accounted for almost 80% of the bids and weighted average yields declined by 16bps- 20bps. However, AKD Securities cautions that this may be end of the monetary easing cycle for now with risks emanating from 1) persistent price pressures going forward, 2) risks on the external front (high CA deficit of US$2.15bn in 1HFY12) and 3) fx reserves erosion particularly if earmarked -US$2.5bn in foreign inflow does not materialize.

CPI in double digits: AKD Securities expects Jan’12 CPI to clock in at 1O.5%YoY with a MoM increase of 19%. As a result, 7MFY12 average CPI is projected to register at 10.8%, more than 1% lower than the Discount Rate (12%). The sequential increase in price pressures is primarily expected on the back of the increase in gas tariffs from Jan 112 and consequent spill over effects on the entire CPI basket. At the same time AKD Securities believes Core/NFNE inflation will discontinue its sequential downtrend going forward.

Money Market eyeing rate cut: Despite the steep expected MoM increase in CPI, AKD Securities expects SBP to cut the DR by 50bps to 11.5% where money market sentiment appears to support AKD Securities’ view. In this regard, the last T-bill auction attracted bids of PkR276bn (vs. target of PkR75bn) with the 6m and 12m tenors together accounting for almost 80% of the bid amount. At the same time, weighted average yields declined by l6bps-20bps to 1156%-11.69%. In AKD Securities’ view, the shift towards longer-term maturities together with lower yields indicates the money market is eyeing at least a 50bps cut in the DR.

Inflation Outlook: Should MoM CPI average 1.2% for the remainder of FY12, full-year FY12 CPI will average 11.5% which underpins AKD Securities’ call for a 50bps cut in the DR. While this may extend the KSE’s recent bull run, AKD Securities cautions that the monetary easing cycle may end in Feb’12 with risks emanating from 1) persistent price pressures going forward, 2) risks on the external front (high CA deficit of US$2.l5bn in 1HFY12) and 3) fx reserves erosion particularly if earmarked ~US$2.5bn in foreign inflow does not materialize. As a result, AKD Securities does not rule out rate increases over the medium-term.

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