Single-digit CPI gives space for cut in SBP policy rate

CPI numbers released by the Pakistan Bureau of Statistics yesterday came as quite a surprise as the reported single-digit CPI is the lowest since December 2009. The month-on-month number also showed a decline after seven months. Which categories take credit for this slump seen after a long time? They were the Housing, Water, Electricity, Gas and Fuels and Transport. The month-on-month decrease in these categories was expected, given the reduction in POL prices by OGRA in mid-June and again at the beginning of July. Consequently, motor fuel prices went down by about 9 percent in July 2012 relative to the previous month. Ironically, prices of transport services continue to be resilient, having risen by 2.56 percent in July relative to June 2012. The same was also seen last month in June when prices of transport services continued to show a month-on-month increase of 3 percent despite the month-on-month motor fuel prices falling by 7 percent. A check on rates charged by public transporters appears to be in order. As for the Housing, Water, Electricity, Gas and Fuels sub-index, the phenomenal month-on-month decrease in gas prices of a whopping 49 percent brought down this categorys month-on-month figure to a negative. The decrease in domestic gas tariff announced by the Petroleum Ministry, effective from July 1, explains the decrease in this sub-head. But, we may not see this continuation of fall in petroleum products prices as August started with a 9 percent increase in petrol prices relative to the last revised prices, besides an increase in CNG prices as well. These had been raised in mid-July too. The effect of both the increases will be clearly seen in the CPI numbers for August. Food was the other subindex to watch out for, considering the effect of Ramazan on sales of perishable food items in particular. Unsurprisingly, prices of fresh fruits and vegetables, potatoes, onions, tomatoes, and cooking oil-conventionally-used items for Iftar-showed a significant month-on-month jump. Its noteworthy that for the period that PBS has surveyed for Julys CPI numbers, Ramazan had not even begun. However, in the coming CPI review for August, the entire period would be covering Ramazan and month-on-month food prices will be worth watching for significant expected increases. Besides these key areas, other concerns to CPI also emanate from other variables in the economy. First, the likelihood of the rupee depreciating further in the wake of balance of payment pressures will have a consequent effect on CPI thanks to imported inflation. The effect is particularly relevant as far as oil prices are concerned, with a depreciating rupee exerting pressure on oil imports and oil prices at home. Globally, no significant change in oil prices, either higher or lower, is expected, so the pressure from currency depreciation will be pretty much there. Secondly, the current year is an election year, so the government will be generous with development spending, putting further inflationary pressure on the economy. Finally, and very importantly, the governments significant borrowing from the central bank seen lately has injected excess liquidity in the system, fuelling inflationary pressures even more. So, the single-digit figure released this month should not be a cause for complete celebration, with expectations that the CPI number will go up again in the coming month. In fact, the SBP ought to be wary of all the above-mentioned concerns when drafting the monetary policy as well. Yet, the signing of a MoU with the US on restoration of NATO supplies-which would ensure release of over a billion dollars from the US-is a good omen. SBP is expected to issue its Monetary Policy Statement on Aug 10, 2012. The Central Board of Directors of SBP has to take into account the nominal interest rates less expected inflation rate (CPI) for full year of 2012 to ascertain the real policy rate. The catch is expected inflation upto end June 2012 and not the CPI for July. Based on factors such as POL prices, once again showing an uptick, CSF inflow easing off pressure on domestic sources, worldwide spurt in food prices, etc., expected yearly inflation could be above 9.5 percent. However, the forecast of various indicators still shows yearly inflation to be within 10 to 11 percent. This provides SBP the space to cut a policy rate from 12 percent while keeping it still in a positive territory. A 50-100bps cut in upcoming monetary policy review cannot be ruled out.

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Major CPI groups - July 2012
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                                     Y/Y chg (%)   M/M chg (%)
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CPI general                              9.60            -0.25
Food & non-alcoholic beverages           8.73             1.89
Non-perishable                           8.58             0.73
Perishable                               9.58             9.28
Housing, water, elec, gas & other fuels  5.60            -3.54
Clothing & footwear                     15.83             0.97
Transport                               12.57            -2.40
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Source: PBS