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Pakistan Economy_Apr’17 CPI Preview

​CPI based inflation for Apr'17 is projected to clock in at 4.28%YoY, a significant dip in comparison to 4.94%YoY recorded in the previous month of Mar'17, while the sequential increase is expected to remain fairly same 0.85%MoM/0.90%MoM for Mar'17/Apr'17. The decline is expected to come on the back of slower sequential growth in food prices, (0.5%MoM in Apr'17 vs. 2.04%MoM in Mar'17), although partially offset by seasonal uptick in housing rent (1.25%MoM). Subsequently, the average CPI for 10MFY17 would stand at 4.04%YoY vs. 2.8%YoY for the corresponding period in FY16. Moving forward, we anticipate inflation levels to continue their upward trend backed by rising global oil prices (Arablight expected to average US$55/bbl for CY17), thus bringing average CPI for CY17 to 5.0%YoY vs. 3.8% in CY16. In tandem, cuts in the monetary policy rate seem unlikely this year with real interest rates hovering comfortably in the positive zone (CY17F average at 75bps).

Apr'17 CPI Preview - Expect an Unexpected Dip: CPI inflation is expected to record at 4.28%YoY for Apr'17, falling sharply in comparison to 4.94%YoY in Mar'17. This is on the back of slower assumed sequential growth in food prices for the month (0.4%MoM in Apr'17 vs. 2.04%MoM in Mar'17). As indicated by SPI data, the lower-than-historical sequential increase for the food index (1.66%MoM average in the month of Apr over FY11-16) can be pinned down to a fall of prices of perishable items. However, this is expected to be partially offset by a simultaneous periodical uptick in housing rent index (1.25%MoM) lifting our expected sequential increase in the CPI Index to 0.9%MoM (vs. 0.85%MoM in Mar'17). With this, the average CPI inflation for 10MFY17/4MCY17 is projected at 4.04%YoY/4.28%YoY vs. 2.8%YoY/3.87%YoY in 10MFY16/4MCY16. Moreover, NFNE Core inflation is expected to increase to 5.5%YoY in Apr'17 vs. 5.3%YoY in Mar'17 on uptick in the rent index. .

CY17 inflation outlook: We expect inflation levels to move upwards with seasonal uptick expected around Ramadan, raising food and clothing prices. Moreover, CPI inflation is also forecasted to rise supported by increasing global oil prices (Arablight expected to average US$55/bbl for CY17). However, with the anticipated slowdown in Apr'17, inflation is likely to bring the average CPI for CY17 to ~5.0%YoY vs. 3.8%YoY in CY16. In tandem, NFNE Core inflation CY17 average is forecasted at 5.8%YoY vs. 4.7%YoY in CY16. .

MPS outlook: Our inflation projections for the year open room for SBP delaying a reversal in interest rate (TR/DR at 5.75%/6.25%) to support the recent momentum in private sector lending (14.7%YoY as of Mar'17 vs. 10.7%YoY in Jun'16) with real interest rates also remaining in the positive zone (+158bps/+75bps average in FY17/CY17). That said, external risks gaining prominence are a key concern particularly with upcoming repayments (US$400-500mn to Paris Club and US$750mn Eurobond maturity) and rising imports (14.2%YoY in 9MFY17) translating in to higher current account deficit (US$6.1bn in 9MFY17 vs. US$2.3bn in 9MFY16). In this regard, expected debt inflows (US$3bn foreign debt budgeted for remainder FY17) will be a mitigating factor to fall in fx reserves, in our view, allowing SBP to maintain its accommodative monetary stance this fiscal year.