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Morning Call about Monetary Policy Statement- Arif Habib Limited

Karachi: Rate pauses at 12% – Waiting for macro-lining to clear

The State Bank of Pakistan (SBP) left monetary policy unchanged at 12% in line with Arif Habib Limited’s expectations, with the overnight repo rate at 11.86% and 6M KIBOR 11.91% (as of 29th Nov’11).

According to Arif Habib Limited, the key comments of the monetary policy decision came in the light of persistent inflation (in particularly the growing concern over non-food component) and the pace of widening current account deficit.

What should not have been overlooked (Core price)
“although the YoY CPI inflation stands at 11% in Oct’11, the MoM inflation trends, averaging at around 1.3% during the first four months of FY12, show existence of inflationary pressures..[And] almost all of these items belong to the non-food category” – MPD

Arif Habib Limited has been arguing for some time that, although the CPI based inflation have been receding but what concerns us is the rigidness in the core prices which remained downward sticky (NFNE still at 10.6% YoY and Trimmed, 11.7% YoY for the period of Oct’11) hinting towards materializing second round effects of high oil prices (4QFY11, Gulf Arab Light averaging USD ~113/bbl, against USD ~108/bbl 1QFY12, ~+109% YoY). As core prices continue an upward trajectory chances of this price pressure feeding into headline inflation cannot be ruled out.

and what should be overlooked (Wheat Support Prices)
“[Government] increased its wheat support price by Rs100 to Rs1050 per 40kg for the next wheat procurement season” – MPD

In a tune much directed towards rising food price pressure in the near future the MPD brought upon the recent price adjustments in Wheat Support Price (PKR 1,050, up by 10%), into limelight. This in Arif Habib Limited’s view will do less of harm, as Arif Habib Limited estimated an additional impact of a mere 0.78ppt may eventually add up in the CPI inflation, going forward (with a 12M term in view)

External accounts linger on ‘oil’s not so well’ state
“On the external front, the earlier comfortable external current account position for FY12, which helped SBP in lowering its policy rate, has become less benign.” – MPD

Given the very possibility of Pakistan trade deficit over-shooting the initial set target of USD ~12bn, the external account of country continue to paste a gloomy picture. Perhaps the most worrying development over the follow-up of previous MPS – as Arif Habib Limited noted earlier in Arif Habib Limited’s policy rate expectations Monitoring external accounts, key to assess rate stance … With SBP remaining confident in achieving CPI targets,

“Thus, while the average inflation may settle around the targeted 12 percent for FY12…” – MPD

Arif Habib Limited suspects therefore that, this very header (CA) will now be a table top priority in assessing further rate easing stance. Unfortunately, Arif Habib Limited does not hear good news coming in, as to put some stats in prospective the oil (measured as of Gulf Arab Light) is still trading above the USD 108/bbl mark (as of 29th Nov’11). This combine with a gradual fall in cotton prices (textile sector, weightage in total exports almost constitutes ~55%), will likely keep the trade deficit at the higher
end.

So, does this renders a rate re-tightening stance?
Probably, not yet, well at least for the current FY12. Arif Habib Limited’s initial concerns emerged mainly on the growth prospects driven primarily via private-sector investment pick-ups, still remains salty. The SBP identifies government borrowing curtailment through schedule banks, broadening tax reforms and financial market deepening (competitive banking system), as the broadest measure to mobilise private sector investment. Arif Habib Limited holds Arif Habib Limited’s reservations that any of these ambitiously broadest measures are likely to materialise any time sooner.

and on bank lending behaviour – spreads up by 18bps in Oct’11
Arif Habib Limited suspects the bank’s lending behaviour toward private sector is unlikely to change in near-term, despite falling banking sector spreads (up by 18bps to ~7.7% as of Oct’11 from ~7.5% in Jul’11). A bitter taste of bank’s standing NPL’s (PKR ~629.6bn till Sep’11, including DFI’s, up by ~+6%) along with extensive risk-free lending window in government securities, will likely keep the bank’s lending behaviour unchanged in the medium-term. Arif Habib Limited believes if there is any magic under the sleeved then, 1HFY12 fiscal figures will be an anxious wait.

Where monetary cycle is heading for
So, down to what’s in the monetary cycle going forward. Key triggers, Arif Habib Limited highlighted improvements in external accounts and depressing price pressure in oil prices and Arif Habib Limited may sees a possible 50-100bps cut. How soon, Arif Habib Limited will have to wait for some development to incur.

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