Inflation cools faster than expected, rate cuts seem

KARACHI: Pakistan’s consumer inflation was more muted than expected in April signaling persistent economic weakness but giving central bank room to further ease policy to support growth, analysts said on Friday.
The State bank of Pakistan (SBP) looks set to cut interest rate by at least 50 basis points, which could be the fourth consecutive cut in policy rate this fiscal year. The SBP’s board of directors will announce its monetary policy decision for May-June 2015 period today.
The bank pruned benchmark policy rate by one percentage points to a decade low of 8.0 percent in its last monetary policy announcement in March.
The consumer price index (CPI) rose 2.1 percent in April from March. The fall in CPI was largely because of a decrease in global oil and commodities prices.
Analysts said the consumer prices remained sluggish in April and there is a need to cut interest rates again.
“We are expecting a 50 bps cut in discount rate based on downward inflation trajectory, coupled with shrinking current account deficit and improving foreign exchange reserves,” said Komal Mansoor, analyst at Landmark Capital. “If SBP cuts rate according to consensus, it would bring Pakistan’s policy rate to multi-decade lows. Most developed and regional countries have also adopted an expansionary monetary policy like USA, Eurozone and India.”
Analysts, however, worried about the country’s economy, whose growth picked up last year after sluggish five years period. Pakistan’s annual economic growth slowed to 4.2 to 4.4 percent in the current fiscal year – undershoot the official target of 5 percent.
The central bank is widely expected to ease policy by cutting interest rates further, although some analysts believe it may be pausing on policy easing to wait for recent actions to take effect and lift growth.
The central bank’s efforts are encouraging, but a rate cut is not a magic bullet, they added.
The central bank is running alternatives to spur economic growth. However, credit to the private sector is on the decline. Private sector lending reduced to Rs162 billion in July-May FY15, compared with Rs293 billion during the same period of the last fiscal year.
Some analysts expect 100 basis points cut in the discount rate, with most predicting a reduction of 50 basis points or half a percentage point to 7.5 percent.
The low inflationary trend allowed the central bank to cut interest rate in successive monetary policy announcements from November 2014 onward.
The SBP projects CPI inflation in the range of 4 to 5 percent for the whole year, compared with the original target of 8 percent.
Analysts said falling yields of treasury papers and long term bond also suggest a soft policy stance by the central bank.
In a latest auction, yields on all maturities of market treasury bills—government debt instruments, fell to 6 percent.
International financial support is in play and the SBP is building up reserves. As of May 15, country’s total liquid reserves rose to $17.749 billion while the foreign currency holdings of the central bank stood at $12.512 billion.
The current account deficit narrowed to $1.364 billion in July-April 2014/15. Remittance inflows rose to $14.970 billion in July-April FY15.
Forex market is calm and the rupee-dollar parity has not crossed the key psychological barrier of 102 despite some pressure.
Analysts said the outlook for the external current account looks positive for FY15 for many reasons: forex inflows are realising, including coalition support fund; divesture of HBL; receipts from the IMF (International Monetary Fund) and disbursements from the ADB (Asian Development Bank), World Bank and other sources.