Pakistan Economy: CPI reading alters MPS outlook
​Sinking back to its 5mth low, CPI inflation came in at 3.93%YoY in Jun'17, surprising considerably on the lower side (market consensus: 4.5%YoY average). The deviation came on the back of decline in the food basket (-0.2%MoM) against general expectations of limited uptick on the back of Ramadan season. The month's reading stands significantly lower than 5.02%YoY recorded in May'17 with the index slipping 0.41%MoM (+0.02%MoM in May'17). Incorporating this month's reading, we lower our inflation projection for CY17F/FY18F to 4.3%YoY/4.8%YoY, pushing a reversal in the interest rate cycle to FY18-end with real interest rates expected to turn negative in Jun'18 . That said, risks prompting an earlier move include a rapidly weakening BoP position where any currency weakness beyond expectations (Rupee crossing PkR108/US$) can push inflation significantly higher.
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