Monetary Easing Cycle Continues

Summit Capital Private Limited.

• SBP slashed the discount rate by 50bps to 6.5% in its Sep’15 monetary policy statement.
• The decision to hold its stance of monetary easing was mainly based on consistent slowdown in CPI growth, widening real interest rate and depressed private sector growth.
• We expect inflation to remain subdued in 1HFY16 primarily due to high base effect (which will last till Nov’15) and falling global commodity prices (especially oil ).
• Going forward, we don’t see any further easing in monetary policy.

State Bank of Pakistan (SBP) has slashed the discount rate by 50bps to 6.5% for the next two months. The decision to cut the discount rate came on the back of

1. Soft CPI reading for the month of August’15 (1.7% YoY), that dragged the average inflation for 2MFY16 to 1.76% (YoY).
2. Declining M2 growth during the last few months which was recorded at PKR-195bn as on 28th August 2015, reflected a fall of 1.73% (FYTD). Much of this deceleration is due to reduction in Net Domestic Asset of the banking system
3. Slight improvement in external current account deficit due to declining international oil prices and higher worker’s remittances.
4. Aim to stimulate private sector lending and to support falling exports.

Inflation to remain moderate during 1HFY16…

On the contrary, some risks to our forecast include. 1)The recent hike in gas tariffs 2) PKR depreciation against US dollar and 3) GoP plans of exemptions of subsidy on electricity might increase the pace of inflation. However, we believe that lower oil prices are likely to more than offset the impact of gas tariffs, currency depreciation and exemption of subsidies on electricity.

MPS Outlook…

We expect monetary easing is nearing the end of its cycle as the low base effect sets in from Dec’15. Therefore we don’t foresee any further cut in the discount rate.