The State Bank of Pakistan (SBP) is scheduled to release the last Monetary Policy Statement (MPS) for FY12 on June 8, 2012. We expect the SBP to maintain a status quo with keeping the discount rate at 12%. The central bank has kept the policy rate unchanged since Nov-11.
Rise in May-12 inflation not overtly worrying
Inflationary pressures that were high at the beginning of FY12 have remained at relatively contained (albeit rising) levels during much of the 2HFY12, with January to April monthly inflation peaking at 11.3%. Only in May-12 did the CPI breach the 12% mark, and was recorded at 12.3%. Since the upcoming Monetary Policy Statement is going to be the first of FY13’s, and with an annual inflation target of 12%, we believe that SBP is likely to adopt a ‘wait-and-see’ approach rather than a ‘preemptive’ one. FY12’s expected average inflation of 11.1% falls well within SBP’s inflation target of 12% for the current fiscal year. Moreover, even though inflation has been heading north in recent months, it is pertinent to note that non-food inflation, which stood at 13% in May-12, has been the major driving force behind last month’s inflated CPI figure. The rise in non-food inflation primarily occurred at the behest of a hike in power tariff (of up to 16%). SBP has traditionally been more responsive to food price hike than to any other component. Along with this, we believe that SBP will also be factoring in the recent decline in international food and commodity prices (Arab Light oil price has come down from a high USD 126/bbl in Mar-12 to an 18-month low of USD 94/bbl) in the upcoming MPS, which will be yet another factor working towards the retention of discount rate at the current level.
Narrowing Current Account deficit yet another reason to hold rates
Even though the country’s current account has remained in the negative territory in FY12, its severity has been on a declining trend for most of the year. Although Apr-12’s current account deficit of -1.6% registered an increase over 3QFY12’s average of -1.1%, falling international commodity prices (in particular oil), should prevent SBP from basing any rate hike decision on the negative C/A balance alone.
High level of deficit monetization and PKR depreciation some key risks
We flag the high levels of government borrowing from the central banks as one of the key risks to our stance. Thus far in FY12, GoP has borrowed PKR 405bn (PKR 195bn in 4QFY12TD alone) from the central bank, which is a textbook indicator of rising inflation in the coming months. Such an eventuality would provide the SBP a justification to increase the discount rate in future monetary policies. Another factor which is working towards a rate hike is the inability of the government to meet its T-Bill auction target(s) in four out of the five auctions held in 4QFY12, suggesting market participant’s ‘desire’ for higher rates. Also, exchange rate has depreciated by almost 3.8% in 4QFY12, a factor which the monetary authorities would be watching closely.
(AH)
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