AKD Quotidian about — CPI Preview Mar’12

Karachi: AKD Securities expects CPI in Mar’12 to clock in at 10.82%YoY, translating into a 1.2%MoM increase, higher than the 0.3%MoM CPI increase in the previous month.

According to According to AKD Securities, the rise is expected on the back of increase in fuel/energy prices and increased government borrowing from SBP, and corroborated by the SPI trend which also suggests an uptick in price pressures. This should lead to 9MFY12 CPI averaging 10.93%YoY, 8.9% lower than the Discount rate (12%) whereas the 12m moving CPI average still stands at 11.4%. Going forward, AKD Securities expects full- year FY12 CPI to average -11.2%YoY, going by a 1.4%MoM incremental increase. This is inline with the 11%-12% inflation expected by the SBP. That said, risks to inflationary pressures remain via 1) any sustained increase in oil prices (Arab Light: US$123.28/bbl), 2) potential populist decision making and fiscal profligacy (e.g. higher crop support prices), 3) PkR weakness vs. the US$ leading to imported inflation and 4) government indiscipline in borrowing from SBP. Going by the latest PIB auction, the bond market has also factored in the change in inflationary expectations with 10yr PIB cut-off yields up by 50bps to 13.20%. However, AKD Securities does not expect any change in Discount Rate in the upcoming MPS.

Inflation Outlook FY12: Going by recent data, there is a notable shift as SPI has started to gain upward momentum with increase in domestic food prices and consistent petroleum products’ price hike. AKD Securities expects CPI in Mar’12 to increase by 1.2%MoM to 10.8%YoY. This should lead 9MFY12 CPI to average 10.93%YoY. Assuming a 1.4%MoM increase in CPI, full- year FY12 CPI will average ~11.2%, still lower than the Discount Rate (12%). That said, risks to inflationary pressures remain in view of 1) PkR/US$ depreciation of 5.4%FYTD leading to imported inflation pressures, 2) pass-through of int’l oil prices and 3) potential populist decision ahead of the election year. Nevertheless the former, with increased intervention (OMOs) by the central bank in the money market, is less of a concern.

Money market sentiment has shifted: The bond market has followed the change in inflationary expectations. In the last auction, the cut-off yield across the 3yr, 5yr and 10yr tenors rose by 14bps, 24bps and 50 bps to 12.59%, 12.94% and 13.2%, respectively. While interest rates have bottomed and while the bond market has pre-emptively indicated expectations for a rate hike, AKD Securities does not expect any rate hike in the next MPS in Apr’12 as CPI still trails DR.

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