Pakistan Economy_MPS outlook
Despite rising oil prices (MOGAS/HSD up 4.1%/2.7%MoM) inflation for the month of March is expected to remain low primarily on the back of high base effect kicking in along with downtick in perishable food items. In this regard, we estimate CPI inflation to clock in at 3.03%YoY (vs 3.8%/4.95%YoY recorded in Feb'18/Mar'17), while NFNE core inflation is likely to remain stable at 5.2%YoY. That said, we believe inflationary pressures should start to build up towards end FY18 with CPI expected to average out at 4.1%YoY - well below the SBP target of 6%. Moreover, real interest rates stand at comfortable levels (+220bps for FY18F against 10year avg. of +210bps) along with promising growth in LSM (+6.5%YoY in 7MFY18). Additionally, the impact of interest rate differential in the backdrop of an increasing Fed rate has been somewhat countered by local currency depreciating ~8.7% FYTD. Taking these factors into consideration, we expect status quo in the upcoming MPC meeting on Mar 30'18. That said, case for a 25bps hike can be made as a preemptive measure in response to risk of an overheating economy (even though inflation stands at manageable levels) as well as to finance widening fiscal imbalance (fiscal deficit at 6.2% of GDP in FY18F).
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