Policy rate likely unchanged on high inflation

KARACHI: The State Bank of Pakistan (SBP) likely to keep policy rate unchanged due recent surge in inflation, analysts said on Thursday.

Analysts at Arif Habib Limited expect inflation to remain elevated in upcoming months on account of regular adjustment in electricity price (fuel cost adjustment and base tariff hike), another round of gas price increase, increase in prices of petroleum products and continuous surge in prices of perishable and non-perishable food items.

On monetary policy front, they maintain status quo stance on the upcoming Monetary Policy Statement (MPS) scheduled on 28th Jan’20, with no change expected in interest rate (policy rate to be maintained at 13.25%) as they believe surge in inflation is due to supply disruptions of key commodities and this might settle down in coming months. We expect inflation to start declining from March 2020 to 11.5% due to high base effect. After considering forecasted inflation, we expect rate cuts to begin from March 2020.

They expect January 2020 inflation to settle at 13.58% YoY compared to 5.6% in Jan’19 and 12.63% in Dec’19, respectively.

The YoY uptick in CPI is expected on the back of i) increase in prices of non-perishable products including Pulse Moong, Chicken, Pulse Gram, Eggs, Gur and Wheat Flour, ii) increase expected in quarterly house rent index by 1.5%, and iii) increase in prices of petroleum products.

Whereas decline in prices of perishable items is expected to keep the inflation restrained. This will take the 7MFY20 average inflation to 11.46% compared to 5.9% in 7MFY19. On a yearly basis, increase in inflation will likely be led by Food (+21% YoY), Transport (+15.4%YoY), Alcoholic Beverages & Tobacco (+14.6% YoY), and House Hold Equipment (+12.9%).

On a MoM basis, CPI reading is expected to increase by 1.20% attributable to surge in House Hold Equipment index (+2.4% MoM), Housing Index (+1.7% MoM), Food index (+1.4% MoM) and Transport Index (+1.4% MoM).

As per three weeks Sensitive Price Index (SPI) data published by the Pakistan Bureau of Statistics (PBS), average prices of Pulse Moong, Chicken, Pulse Gram, Eggs, Gur and Wheat Flour are expected to register a jump of 15%, 13%, 13%, 11%, 8% and 5% MoM, respectively.

On the other hand, meagre decline in prices of essential food items like Onions (-15% MoM), and Tomatoes (-5% MoM) are expected to keep the food index contained.

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