Economy : MPS – DR expected to be maintained at 12%…

Synopsis…

• SBP is scheduled to announce monetary policy for the period of next two months on08th June '12 where we expect discount rate to stay unchanged at 12%.

• Our expectation for an unchanged discount rate is mainly due to inflation numbers, as the average inflation stands at 10.97% YoY during July to May, 2012. We expect full year inflation to remain below the target of 12%.

• Key risk to our stance for an unchanged discount rate is emanating excessive borrowing where GoP has already borrowed of PKR1.0tn and US dollar appreciation against Pak Rupee attributable to weak economic condition and principal repayment to IMF.

Discount rate is expected to stay at 12%…
SBP will announce its next Monetary Policy Statement (MPS) on 08th June, 2012. We expect discount rate is likely to stay at 12.00%. Our anticipation of an unchanged discount rate is mainly based on inflation numbers as the average inflation stands at 10.97% YoY during July to May, 2012.

Average inflation reaches 10.97% during July to May, 2012…
The CPI clocks at 10.97% YoY during July to May, 2012 as against 13.69% in the same period last year. Average inflation is almost 103bps lower than the discount rate of 12%; therefore, we are not expecting any hike in discount rate. As far as the monthly inflation is concerned, CPI stands at 12.3% YoY at the end of May, 2012 as compared to 11.3% YoY in the previous month and 12.6% YoY in the same month of last year. This increase in monthly CPI was mainly due to 1) Electricity, Gas & Fuel charges which constitutes 29.41% of the total CPI basket pushed the headline inflation by 73bps and 2) Non perishable food item which constitutes the highest weight of 29.84% of the CPI basket also impacted the inflation negatively by 16bps.

Excessive GoP borrowing and Pak Rupee depreciation may further increase inflation going forward…
Government has so far borrowed PKR1.0tn from domestic sources; Government has borrowed PKR442bn from the SBP while PKR642bn has borrowed from the scheduled banks. Government has failed to get the required external inflows to finance its budget deficit; therefore the burden has been shifted to commercial banks and SBP. In our view, the persistence of higher budget deficit increases inflation which may lead to higher interest rates going forward. Moreover, the Pak Rupee has depreciated by 7% from beginning of the current FY12. The weak economic fundamentals including widening current account deficit attributable to higher import bill and excessive government borrowing were the major reasons for depreciation of Pak Rupee against US dollar. Above all, the principal repayments to IMF have further impacted negatively on Pak Rupee against US dollar, especially due to absence of foreign inflows. The excessive government borrowing and US dollar appreciation against Pak Rupee attributable to weak economic condition may further increase headline inflation, as a result of this, a hike in discount rate may be expected going forward.
(SC)

Economy : MPS – DR expected to be maintained at 12%…