[four_fifth_last]Elixir Securities Limited – Elixir Insight

Karachi, September 20, 2016 (PPI-OT): Pakistan Economy

Inflation Preview September 2016

Elixir Securities Limited expects headline inflation for the month of September to clock in at 4.04% YoY (Aug 3.56% YoY) with MoM inflation expected at 0.36%, taking FYTD average inflation to 3.9%.

While sequential dip in inflation in outgoing month was led by food deflation, Elixir Securities Limited expects food inflation to rise by 0.83% driven by rise in prices of perishable food items.

While Elixir Securities Limited does not rule out the possibility of another 25bps rate cut in the upcoming monetary policy given adequate RIR cushion but challenges on external account and currency management would likely induce a cautionary approach in Elixir Securities Limited’s view.

Elixir Securities Limited thus believe that the monetary easing cycle has concluded with SBP to remain remain cognizant of the upcoming challenges on external account and currency.

Food inflation to drive CPI in Sep-16: Elixir Securities Limited expects headline inflation for the month of September 2016 to clock in at 4.04% YoY with MoM inflation expected at 0.36% compared to 3.6% YoY in August 2016. This would take FYTD average inflation to 3.9%. While sequential dip in inflation in August 2016 (i.e. -0.29%) was primarily driven by food deflation where prices of various food items normalized following a surge in the month of Ramadan (+3.2% in Jul-16), Elixir Securities Limited expects inflation to rise 0.35% MoM. Sequential rise is primarily driven by food inflation (+0.83% MoM) with prices of perishable items rising (i.e. Potatoes+2.1%, Onion+16.9% and Tomatoes+8.3%).

Room for another 25bps rate cut intact… Elixir Securities Limited does not rule out the possibility of another 25bps rate cut in the upcoming monetary policy meeting scheduled in Sep-2016 (date not yet announced) given adequate RIR cushion which is expected to remain in the range of 100-190bps in FY17. Elixir Securities Limited maintains Elixir Securities Limited’s full year average inflation expectations at ~4.5-5%.

But prudency indicates otherwise: Having said that, Elixir Securities Limited believes prudent monetary policy management indicate otherwise considering potential challenges on the external account front given 1) conclusion of payments under IMF program, 2) risks on remittances given increasing likelihood of sustained low oil price scenario, iii) impending US fed rate hike iv) gradual economic recovery to improve aggregate demand and v) redirection of government’s borrowings for budgetary support towards SBP from commercial banks with FYTD borrowing from SBP and commercial banks amounting to PKR791bn and PKR-522bn (net retirement).