KARACHI: After witnessing a surprising lower than estimated inflation as measured by CPI 11.56 percent in Aug 2011, the numbers for September will bring some more positive news and the State Bank is likely to cut its policy rate by 50 basis pints in up coming policy.
According to Topline estimates YoY CPI may fall to 19-months low to range between 10.8-11.2 percent ends of September, 2011.
"This expected ease in inflationary pressures would advocate central bank to continue the process of monetary easing in the upcoming monetary policy scheduled on October 08, 2011", said Nauman Khan an analyst at Topline securities.
Furthermore, the government decision to part ways from IMF would also provide domestic policy makers some room to develop a more indigenous growth oriented but risky plan to protect the nascent economic recovery, he added.
Rebasing of the CPI culminating into reduced inflation projection coupled with expectation of further fall in inflationary pressure has a marked impact on secondary market dynamics.
The most demanded 1-year T-bill yield has approx. eased by 28-30bps in last 1-week (post publication of August CPI numbers) and this yield is down 31-33bps from last September 21 T-Bill auction cut off of 13.31 percent, he informed.
Adding, this shows that market participants have already factored in a higher than 50bps cut since yield has trimmed down by 85-89bps since the announced of last monetary policy in July, 2011.
However, he said that the upcoming T-bill auction on October 05, 2011 (last before MPS) would further clarify the views of bankers and investors about the quantum of discount rate cut.
"We expect cut-off yields to decline in the range of 20-40bps for various maturities in the upcoming T-Bill auction" Nauman added.
Talking about the policy rate he said that in then next monetary policy a 50bps cut now is expected while another 50bps in Nov 2011 as recent downward revision in the inflation numbers has created a considerable room for the SBP to bring down policy rate while still keeping the real interest rates in positive territory.
However, keeping in view the commodity price risk faced by the external account which could render into higher PKR depreciation, supply constraint faced by the economy and the fact that monthly CPI inflation increase is still 1 percent since last 3-months, we think SBP to follow a gradual reduction.
"We feel that 50bps cut now will provide central bankers enough time to evaluate the external account, CPI trend, local currency and dollar inflows in coming few months. And if everything goes well than another reduction to of 50bps in November would be a better choice", Topline analyst said.
Copyright Business Recorder, 2011
Comments
Comments are closed for this article.