Pakistan Economy: A critical MPC decision awaits
- May’19 headline inflation (tentative) is expected to clock in at 9.62%YoY vs. 8.82%YoY in Apr’19 and 4.19%YoY in May’18. This would mark a five year high – a level last seen in late 2013.
- IMF’s initial press release clearly highlights the need for i) further adjustment in utility rates, and ii) more fiscal consolidation primarily through revenue mobilization. These along with further weakness in rupee should translate into higher inflation going forward. We highlight avg. 10% increase in both utility prices (i.e. electricity & gas) would raise our avg. inflation estimates by 60bps.
- We expect 100bps hike taking into account i) inflationary pressures arising from utility rate hikes, rupee devaluation and budgetary measures and ii) real interest rate (with May’19 inflation of 9.62%, real interest rate stands at mere 1.0%). However, we do not rule out a surprise on the higher side to this end.
- The announcement has been preponed to May 20th from a routine announcement in last week of the month. We see two reasons behind this move i) to enhance market participation in the upcoming T-bills and PIBs auctions (scheduled for May 22nd & 29th respectively) as the current uncertainty may limit the participation and ii) policy guidance through an announcement to reduce the prevailing uncertainty.
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