Pakistan Economy: 6yr high CPI vindicates pre-emptive rate hike
- Latest PBS monthly data shows headline inflation has hit a six-year high of 10.32%YoY in Jul’19 vs. 8.89%YoY in the preceding month and 5.83%YoY in Jul’18. Sequentially, the CPI index jumped 2.28%MoM.
- One-off utility rate adjustments (~27% contribution to overall reading), recently announced budgetary measures (~23%), quarterly housing rent adjustment (~18%) and rising fuel prices (~9%) were the key factors, pushing monthly inflation reading to a multi-year high.
- Category wise, Housing & Utility index (+12.74%YoY) contributed to half of the monthly inflation (~52%), followed by Food (+7.88%YoY), Transport (+14.67%YoY), Tobacco (+35.74%YoY) and Clothing index, with the respective contributions of 15%, 12%, 7% and 5%.
- While the headline inflation has significantly risen and will continue to remain elevated in the next few months, pro-active monetary tightening and tight parallel fiscal policy provide meaningful room to the MPC to hold interest rates steady. Soft inflation reading in Jul’19 also lends further credence to the same view.
- That said, public debt management in the backdrop of a bar on federal gov’t borrowing from the central bank could complicate the monetary policy setting. The same along with the upcoming inflation readings remain critical in determining the monetary policy outlook.
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