Pakistan Economy: Inflation surprises; monetary easing likely delayed
CPI overshoots estimates: Jan20’s CPI inflation overshot industry estimates by a wide margin with a reading of 14.6% while on a monthly basis, inflation surged by 2.0% MoM. Elevated CPI during Jan’20 was largely a consequent of a significant spike in food prices with food inflation recording an uptick of 3.4% MoM. Moreover, the food inflation metric depicts an even more alarming trend on an annual basis, witnessing an upsurge of 23.7%. Proliferating inflationary pressures during recent times can largely be attributable to supply side shocks with notable examples evident particularly in the pricing trends of Wheat (+13% MoM), Fresh Vegetables (Tomatoes: +158% YoY; Onions +125% YoY and Potatoes: +87% YoY) and Pulses (+20% MoM).
A sustained trend exhibited in inflationary pressures: Recent inflationary trends appear to exhibit upward stickiness despite elevated interest rates, signifying the limited impact of interest rates towards the prevailing cost-push inflation. In Pakistan, we have witnessed inflation as more of a perception game with sellers reluctant on reducing prices on fears of additional inflationary pressures. This scenario has the potential to snowball into the broader spectrum, leading to heightened inflation levels for the overall economy. Incorporating this apparent trend, we have revised our inflation outlook in which we foresee CPI inflation to remain at double digits till Aug’20. We now estimate CPI to average at 12.0% during FY20 against our initial estimates of 11.0%.
Heightened inflation levels to prolong the tight monetary stance: The SBP has explicitly stated inflation as the primary factor influencing interest rates. With inflation levels exceeding our initial estimates, we revisit our thesis of monetary easing where we now anticipate SBP to reduce interest rates by Sep’20 when inflation levels are expected to ease down to single digits. We, however, maintain our stance of interest rates easing down to 12% by CY20 as inflation is likely to move towards the medium-term target range of 5-7% over the next 6-8 quarters.
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