National CPI for February 2020 came in at 12.4% yoy, which is sharply lower than 14.6% yoy in January (down 1.0% mom). Urban and Rural CPI have also slowed to 11.2% and 14.2% yoy vs. 13.4% and 16.3% yoy, respectively, in the previous month. Urban core inflation remained range-bound at 8.0%, while Rural core inflation clocked at 9.4% yoy (vs. 9.0% in the previous month).
Major reasons for the relatively softer CPI reading in February are: (i) deceleration in Food inflation (up 18% yoy vs. 24% in January) and (ii) base effect in other major heads where the yoy inflation ranged between 6-9% yoy. Government efforts to clampdown on supply disruptions in major food items and allowing imports to overcome shortages are partly attributed for the lower food inflation. For example, there was a 17% and 58% mom reduction in prices of wheat and tomatoes, respectively.
Among other major heads, Transport index was up by 19% yoy (still very high), but inflation in Housing & Utilities and Education indices was modest at 6.8% and 7.4% yoy respectively.
We believe future CPI readings will remain soft, where our initial estimates of CPI for March 2020 suggest 10-11%. This is backed by the government decision to defer power and gas tariffs (reportedly agreed by the IMF) and declining petroleum prices amid global headwinds (petrol and diesel prices reduced by 4-5% for March).
For monetary policy, our base case is that the SBP will commence easing by May or July 2020 (by 25-50bps), with a few months of noticeable disinflation until the first cut. However, in light of the mounting global headwinds –coronavirus outbreak in particular – we do not rule out the possibility that the central bank will consider a preemptive cut in the March MPS, even though there has been only one month of disinflation. Central banks globally have recently cut interest rates to revive sluggish growth. The US Fed has also hinted at reducing interest rates to counter expected negative impact of the global coronavirus-led epidemic.
Note that National CPI is averaging 11.7% in the July-February period (within the SBP projected range of 11-12%), despite recent high readings. This leaves ample room for the SBP to maintain a real interest rate of 1.5-2.0% and also cut rates in future, in our view.