Macro Analysis /

Pakistan: September CPI at 11.4% yoy; 1QFY20 inflation remains within projected range

    Saad Ali
    Saad Ali

    Head of Research

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    3 October 2019

    Sep'19 inflation clocked in at 11.4% yoy on 2015-16 Base (12.6% on 2007-08 Base), which was broadly in line with consensus expectations. Urban CPI rose 11.6% yoy in Sep'19, while Rural CPI was up 11.1% yoy. CPI has thus averaged 10.1% yoy during 1QFY19 (11.5% on 2007-08 Base) within the SBP projected range of 11-12% for FY20.  Core inflation in Sep'19 came in at 8.4%/8.8% yoy for Urban/Rural; it has averaged 8.4%/8.5% yoy during 1QFY20.

    Key highlights for Sep'19 CPI (2015-16 Base) are:

    • Strong pick up in food inflation of 15.8% yoy due largely to prices of chicken and perishable food items. These prices have risen 10-40% mom. Chicken prices shot up due to dwindling supply of birds.
    • Transport index (6.1% weight) rose 17.8% yoy due largely to 23% yoy higher petrol prices (2.9% weight).
    • Miscellaneous goods index rose 13.4% yoy, which predominantly include personal-care items and thus are affected by recent PKR depreciation.

    Implications for monetary policy

    Note that inflation has remained within the expected range of SBP during 1QFY20. Readings in Aug-Sep months are expected to be the highest during the year, following which high base-effect will creep in (gas tariff increased in Oct'18), in our view. The average CPI on both bases imply positive real interest rates. Having said that, we maintain our view that SBP will not consider monetary easing before 2020, despite the above inflation trend and current account deficit declining 53% yoy in 2QFY20.  It will remain cautious and would look to avoid a premature impetus to the economy, in our view. Hence, we expect SBP to maintain the policy rate at 13.25% in Nov'19 MPS.

    Note some inflationary pressures remain. NEPRA has increased power tariff cumulatively PKR2.5/kWh during Oct'19 which will likely push CPI readings in coming months (potentially diluting the base-effect). Fiscal deficit remains high, given reports of FBR likely to miss collection targets for 1QFY20. An escalation of tensions in the Middle East, following the drone attacks on Saudi oil facilities in Sep'19, may overshoot international oil prices. Hence a cut in 2019 is not pertinent, in our view.