Elixir Securities Limited – Elixir Insight

Karachi, December 28, 2017 (PPI-OT): Pakistan Economy – Dec-17 CPI Inflation Expected at 4.8%YoY

We expect CPI inflation for Dec-17 to stand at 4.8%YoY vs. 4.0% YoY in Nov-17. We anticipate 0.8ppt increase (between Dec-17 and Nov-17) to be a result of low base effect (+0.7ppt) from drop in food items price levels last year and 0.1%MoM CPI inflation in Dec-17.

We expect CPI inflation to stand at 5.2%YoY in Jan-18 and jumping sharply to 6% in Jun-18 (due to low base effect of last year), and average at 4.4% in FY18 vs. 4.2% in FY17.

We anticipate status quo to continue and expect 3 interest rate hikes of 25bps each in 2018 beginning from May-18. We highlight that any further shocks emanating from PKR depreciation and global oil prices may result in sharper increase in inflation and interest rates.

Low Base Effect to Push Dec-17 CPI YoY Inflation: The weekly SPI data indicates that Dec-17 CPI inflation is likely to stand at 4.8% YoY vs. 4.0% YoY in Nov-17. We estimate that 0.8ppt increase in CPI YoY inflation (between Dec-17 and Nov-17) is to be a result of low base effect (+0.7ppt) from decline in food items price levels last year and 0.1%MoM CPI inflation in Dec-17.

Among the individual CPI components, increase in food inflation is expected to push CPI general inflation as it is expected to increase to 5.6%YoY in Dec-17 from 3.6%YoY in Nov-17. Sharp increase in food inflation is likely to be attributable to high base effect of +2.3ppt (between Dec-17 and Oct-17) from last year in spite of -0.3%MoM food inflation during the month.

Among the inflation variants, Non Food Non Energy (NFNE) inflation/12-month moving average inflation are both expected to rise standing at 5.6%YoY/4.1% in Dec-17 vs. 5.4%YoY/4.0%. The former is expected to be led by monthly increase in non-food item prices which superseded high base effect of -0.1ppt (between Dec-17 and Nov-17). The latter is expected to be push by sharp expected increase in CPI general inflation. On the other hand, Relatively Stable Component (RSC) inflation is expected to stay flat where monthly increase in both (non-volatile) food/non-food inflation is expected to counter high base effect -0.2ppt (between Dec-17 and Nov-17).

Inflation to Remain Volatile: We expect CPI inflation to stand at 5.2%YoY in Dec-17 and jump sharply to 6% in Jun-18 due to low base effect of last year. Going forward, diminishing base effect is expected to result in CPI inflation to reach ~6%YoY and stabilize at that level in the absence of exogenous shocks. However, weaker inflationary pressures, regulated prices and higher base effects are likely to keep average FY18 CPI inflation at 4.4% vs. 4.2% in FY17.

RSC inflation is also expected to increase similarly reaching 5.7%YoY in Jun-18, whereas NFNE inflation is expected to rise gradually reaching at 6.5%YoY in Jun-18.

The recent PKR depreciation and increase in global oil prices may continue to result in higher food and energy prices which may drive up inflation at a much faster pace. Besides, the rising income effect owing to improvement in GDP growth entails additional reflationary effect.

Interest Rate Outlook Unchanged: Our current inflation projections indicate no change in interest rates until May-18 as inflation is expected to remain in a comfortable range. Thereafter, we anticipate 3 interest rate hikes of 25bps each in 2018. However, any further PKR depreciation and increase in global oil prices entail risks of sharper increase in inflation and thus also in interest rates. The government is trying to curtail growing Current Account Deficit (CAD) through export incentive package and levying additional regulatory duties on import of luxury/non-essential items. While hawkish monetary policy would further complement the existing policy actions, this is unlikely as interest rate setting mechanism has more closely followed inflation benchmarking.

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