MPS : status quo stance on discount rate to 12%

Expectation on Monetary Policy Statement (MPS) announcement scheduled today by the State Bank of Pakistan for Jun-12.

Average inflation still under control
The State Banks of Pakistan is all set to announce its Monetary Policy Statement today for the next two months. We expect the central bank to keep the discount rate unchanged at 12% in Jun-12 MPS. The major factors which we are considered for this status quo stance are: i) declining in international oil prices which will reduce the pressure on external accounts ahead as well as price on local front, 2) contained average inflation by far and 3) CY12 a pre-election year where the gov’t would not vote for a rate increase at this point at least. Therefore, we expect this time too the discount rate to remain unchanged. However, due to IMF loan repayments coupled with declining FX reserves, PKR is expected to depreciate further against USD which will put further pressure on SBP to maintain tight monetary stance. However, materialization of the pending Coalition Support Fund (CSF) from the US and planned 3G licenses may provide, if materialized, some cushion to bridge widening fiscal deficits in FY13.

May-12 inflation to 12.3%, not the settler
During the month of May 12, inflation surged to 12.3%YoY whereas food inflation remained at 11.3%YoY and non-food inflation augmented to 13.0%YoY. However, Jul-May average inflation remained at 10.97% which is still below from the revised annual target of 11.5% for FY12. Moreover, during May-12, spike in non-food inflation was mainly due to increase in electricity tariff by 16%YoY, however this time around, reduction in international oil prices by 22% from its peak will also help reduce fuel cost for power sector going forward.

Current account position remains alarming
The external account position also remained weak during the last 10MFY12 with current balance posting a deficit of USD3.4bn. Owing to weaker financial inflows, overall balance recorded a deficit of USD2.5bn during the same period. For full fiscal year, the gov’t is expecting current account deficit to reach USD4.0bn. Furthermore, the gov’t expects external sector weakness continues in FY13 as well as reveals in FY13 current account deficit forecasts of USD4.8bn. In the wake of a weakening BOP position, an installment of USD394mn paid to IMF and depleting foreign reserves, Pak rupee depreciated by 4% against USD from last month. The above would also exaggerate to inflationary pressure amid higher prices of imported goods. However, during the last few weeks, the global commodity prices especially petroleum products witnessed sharp decline tumbling significantly from 20% to 22% from their recent peaks, on better supply situation and major global meltdown fears. If the declining trend continues it will definitely dispel pressures on Pakistan's fiscal deficit.
(InvestCap)

MPS : status quo stance on discount rate to 12%