Pakistan Economy: MPC faces a tough choice, expect 50bps rate cut , (AKD Daily, May 14, 2020)
- The MPC of the SBP - scheduled to meet on Friday, 15th May 2020 – faces a dilemma, with a need to strike balance between providing immediate relief to the economy and preserving macro stability over the medium term.
- On one hand, the inflationary backdrop is benign (~6.8%YoY over the next six months), with corona induced decline in consumption and consequently commodity prices, along with scrapping of utility adjustments, translating into steep decline in inflation readings. This coupled with a need to kick-start the economy or at least alleviate debt servicing burden merits further easing action from the central bank.
- On the flip side, however, the fall in inflation is temporary in nature and inflation might surge again once life returns to normal and the gov’t resumes its reform process under the IMF’s EFF. Aggressive easing at this stage may need to be reversed later, hence we expect the MPC to act prudently by delivering a token rate cut of 50bps in the upcoming committee meeting.
- For May’20, our preliminary workings suggest headline inflation further falling to 7.9%YoY vs. 8.5%YoY in Apr’20 and 8.4%YoY in May’19. The projected decline in inflation is primarily on account of a steep decline in gov’t administered fuel prices (down by avg. ~20%). The same is also projected to offset the impact of the increase in food prices owing to Ramadan, which translates into higher food inflation.
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