Pakistan Economy: Inflation eases as food prices come under control
CPI eases to 12.40% during Feb’20: Inflation during Feb’20 undershot industry estimates, registering at 12.40% during Feb’20 against 14.56% recorded during Jan’20. Moreover, on a monthly basis, CPI fell by 1.04% MoM during Feb’20 in contrast to rising by 1.97% MoM during the preceding month. Bulk of the decline emanated from index heavyweights, including the food segment (-1.99% MoM) and the housing segment (-2.47% MoM). The CPI’s food segment eased during the month supported primarily by the GoP’s intervention to control escalating food prices. Moreover, the housing segment also slowed down on account of falling electricity prices (-13.5% MoM) due to absence of fuel price adjustments. Overall, average CPI inflation during 7MFY20 registered at 11.60% against 5.90% during 7MFY19.
Inflation likely to ease further in the coming month: Fears of proliferating inflation will likely take a breather post Feb’20’s CPI reading, witnessing notable declines in major categories. We believe that falling food prices is a reflection of the GoP’s resolve to keep inflation under grasp by taking various measures including banning exports and opening imports of certain food categories. Moreover, inflation is likely to slow down further in the coming months, likely supported by softer international oil prices post the coronavirus outbreak. The ~25% decline in oil prices to USD 52/bbl since the outbreak has so far translated to a PKR 5.0/litre reduction in both HSD and MoGas prices. We anticipate further reductions in domestic oil prices as the average cost of imported oil inventory dips further during Mar’20. We estimate that if the Pak Rupee maintains its ground, recent trends suggest inflation to touch single digits by Jul’20.
Softer inflation opening room for an earlier than anticipated cut: As inflation depicts further signs of easing, real interest rates will continue to swell further. With Pakistan’s historical interest rates having hovered between 2.00% and 2.50%, we believe the case for an early rate cut gains merit as inflation touches single digits. As external account imbalances continue to align further, evident by the 72% YoY decline in CAD, in addition to rising reserve buffers, we believe the economy is well placed to promote sustained levels of growth. The pressure to jump-start the relatively-choked economy may compel the SBP to reduce rates as early as May’20.
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