Pakistan Economy: Broad economic improvements continue as a sustained low CPI is followed by an improving current account balance with stable currency and ever improving reserves. Mar’14 CPI is expected at 2.6%YoY compared to 8.5% in Mar’14 where despite upward MoM pressure, a favorable base effect will likely keep inflation on the lower side. Average CPI for 9MFY15 is consequently expected at 5.2% as against 8.6% in 9MFY14. Despite expected summer related increase in food prices, inflation is expected to remain muted over the remainder of FY15 primarily due to high base effect. With CPI over remaining 4MFY15 at 3.0% (full year average CPI: 4.6%) and consequent real interest rates at 500+ bps, we expect the State Bank of Pakistan (SBP) to continue with its easing theme, albeit in a cautious manner.
In this regard, the SBP will likely be mindful of potential headwinds particularly from upward revision in administered prices (gas tariffs). As such, we expect the SBP to err slightly on the cautious side where we anticipate a 50bps cut in the Mar’15 MPS (tomorrow), with concurrent cuts over later policy statements, depending on the economic direction. With regards to the market, lack of volumes has kept investors spooked off-late where any surprise in the MPS may unlock interest.