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AKD Quotidian about — Soft CPI losing importance to external a/c

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by March 4, 2013 Brokerage

Karachi, March 04, 2013 (PPI-OT): Feb13 CPI has remained in single digits for the 8th consecutive month, edging lower by D.314%MoM to clock in at 7.38%YoY.

According to AKD Securities Limited this is inline with the SPI trend which also showed a deflationary trend (-O.5%MoM). This brings BMFYI3 average CPI to 8.18%YoY, significantly below the GoP’s target of 9.5%YoY. At the same time, Core (trimmed mean) inflation registered at 9.2%YoY in Feb’13 vs. 9.9%YoV in Jan’13. The sequential fall in overall CPI trend is largely due to 1) larger than expected decline in food inflation (-1.4%M0M), and 2) marginal O.04%MoM increase in housing & utilities.

The soft inflation numbers FYTO will likely lead FY13 CPI to fall well below 9.5%YoY even if AKD Securities factors in sequential price pressures on a MoM basis. However, despite the downtrend in inflation and +ve real interest rates (headline CPI-based), AKD Securities believes monetary easing cycle has ended considering risks to the economy including 1) potential increase in government borrowing (PkR76lbn FYI 3TD but primarily from the banking sector), where deficit monetization has historically led to higher Core Inflation, 2) speculative pressures on the currency leading to imported inflation and 3) weakness on external front particularly if oil prices remain firm.

Feb’13 CPI Review: Feb13 CR clocked `nat 7.38%YoY, translating into a O.34%MoM decline which is significantly lower than the average O5%MoM sequential increase in CPI FYTD, This is corroborated by SPI trend which suggests O.5%MoM deflation (due to decline in food and fuel prices). As a result, this brings 8MFY13 CPI average to 818%YoY, comfortably below the GoP’s target of 95%YoY. Importantly, Core (trimmed mean CPI) softened to 9.2%YoY in Feb’13 vs. 9.9%YoY in Jan’13.

That said, risks going forward remain in view of 1) imported inflation with PkR depreciation of 38%FYTD, 2) any increase in deficit monetization ahead of elections amidst non-materialization of external funds and 3) any uptick in int’l oil price (Arab light presently at US$1 07/bbl vs. CYTD average of US$1 13/bbl). In this regard, while CPI should still remain in single digits by end-FY13, it could potentially rebound back to 1O%+ by 4QCY13.

Outlook: While AKD Securities expects CPI to remain in single digits in FY13, AKD Securities believes that soft CPI readings have become largely irrelevant for monetary policy trajectory with looming risks on the economy and a likely re-entry to an IMF program. In this regard, the benchmark KSE-100 Index failed to depict any excitement on release of below-line CPI data and is subdued in intraday trade today.

Moreover, considering the SBP targets Core (trimmed mean CPI), which has averaged 9.8% in SMFY13 implying -ye interest rate of 0.3%, AKD Securities believes the monetary easing cycle has ended particularly within the backdrop of risks to the currency owing to a weak external account. Alternatively, AKD Securities sees monetary tightening resuming in 21-ICY13, albeit at a gradual pace unless the PkR swiftly loses value where the SBP has started to intervene e.g. recent directive to limit the bid-ask spread to PkRD.25 in the open market.


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