Pakistan Economy: CPI Inflation to reach 4.5%YoY
With the commencement of Ramadan season, CPI inflation is expected to rise sharply to record at 4.5%YoY in May'18 (vs. 3.7%/5.0%YoY in Apr'18/May'17). This jump is likely on the back of increase in food index (up 1.9%MoM) led by spike in perishable food prices, sequentially lifting the CPI index up by 0.9%MoM. Consequently, inflation is expected to average out at 3.8%YoY in 10MFY18, though remaining significantly lower than 4.2%YoY in comparable period last year. On the other hand, core inflation NFNE is expected to stay at 7.0%YoY (vs. 5.5%YoY in May'17). Additionally, MPC is scheduled to announce the MPS on May 25'18, where we expect MPC to increase the benchmark interest rate by 25bps with TR ending at 6.25% (DR: 6.75%). Despite having ample space in real interest rates, standing at an average 250bps in CYTD (vs. 200bps since Jul'09), the hike in interest rate is expected considering: 1) buildup of inflationary pressures (average CPI in CY18E estimated at 5.0%YoY), 2) sharp uptick in NFNE core inflation to 7%YoY in the preceding month (vs. 5.6%YoY average in FY18TD), and 3) elevated pressures on the external front (CAD at 5.3% of GDP) accompanied by sharp drawdown in FX reserves (SBP FX reserves declined by US$5.3bn since Jun'17).
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