Another discount rate cut in the offing to contain deficit

LAHORE – Considering that the economy is still away from growth target of 4.3 per cent, with elections around the corner, the government will clearly try to re-stimulate consumption next year and also try to cut down its borrowing cost to contain fiscal deficit within 5 per cent of the GDP bracket, experts said.

“The central bank may continue with its easing stance by cutting policy rate by another 50bps, which would be more probable with the sooner than later realisation of the CSF money from the US, by $700 million, along with other smaller foreign flows expected in the 2HFY13 alongside any possible deferment of the IMF repayment,” observed financial experts at Arif Habib Securities. These flows should provide much-needed support to the current account and the rupee, with lower inflation and oil prices supporting the rate cut decision, they added.

The Pakistan Bureau of Statistics (PBS) is still to release price indices for the month of Dec in the upcoming week, however, experts have estimated Consumer Price Index (CPI) based inflation for the month of Dec 2012 to clock in at 7.48pc  YoY. Though higher than Nov 2012 figure of 6.93pc, this translates into a sequential MoM decline of 0.19 per cent against 0.4 per cent MoM previous month. With the Dec 2012 inflation remaining in single digit, the average inflation of 1HFY13 should further be lower at 8.25 per cent.

Experts said that oil prices remained stable (crude down 0.4 per cent MoM) while domestic petroleum prices (Petrol and Diesel) were down during Dec by 0.4 per cent MoM so far. Even other energy prices, those of gas and electricity, did not show any major increase or decrease during the aforementioned period. Similarly, the SPI indicator suggests food prices were also under control. And, despite all the concerns of the weakness within the economy, the inflation is expected to keep safely below 9 per cent.

And while the CPI headline inflation has been so far favourable in 1HFY13, experts think the price pass-through of a weaker exchange rate may finally take full sweep in coming months ahead. We have already seen Pak rupee (PKR) depreciating against USD and this sentiment is here to stay for a while. This coupled with declining liquid reserves due to higher debt repayments, should keep rupee resilient above 97. AHL analysts have valued rupee at 101 versus US dollar by fiscal year-end.

Experts said that since the onset of FY13, the continual lowering of inflation has kept it in single digits so far. Given 1HFY13 performance, analysts expect CPI inflation for the FY13 to stay under 9 per cent YoY. With the recent stability in international oil prices and lower food prices, they may see headline inflation to below the government target of 9.5 per cent. This coupled with high base-effect carried forward, it is expected the CPI will average out around 9 per cent YoY in FY13.