As per the latest data released by the FBS, headline and core inflation declined to 10.12%YoY and 11.9%YoY respectively in Sep’09 as compared to 10.7%YoY and 12.6%YoY in Aug’09. With inflation firmly below the level thought to be harmful for economic growth (Khan and Semlali estimate inflation threshold level of 7%-11% for developing economies in their IMF working paper “threshold effects in the relationship between inflation and growth”) the State Bank of Pakistan could continue the monetary easing process with lower risks of causing inefficient asset allocation. We reiterate our expectation of a 100bps cut in the discount rate in the upcoming monetary policy. However, we expect the monetary cycle to bottom in 1QCY10 because of medium term fiscal constraints, resulting in high public sector borrowing requirement and a likely completion of the downward “core” inflationary cycle by Feb’09.
AKD Research
13th October, 2009