Ample room for a rate-cut in March-2020?

March 3, 2020 (MLN): The worries of increasing inflation will likely die after the release of CPI figures for February, observing noticeable declines in major categories.

In February 2020, the annual increase in consumer price index amounted to 12.40% when compared to 14.56% in January 2020 and 6.8% YoY in February 2019, lower than market consensus.

On a monthly basis, CPI witnessed a massive decline of 1.04% MoM during Feb’20 in contrast to rising by 1.97% MoM during the preceding month. While this has brought 8MFY20 average inflation to 11.7% YoY against 6% YoY corresponding period of last year.

The softer CPI reading in February is primarily attributed to the fact that supply-demand imbalances have been reduced in the food segment by allowing imports of food items to overcome the shortages amid price normalization coupled with subdued housing group inflation.

It is pertinent to mention the housing index fell by 2.47% MoM as the monthly fuel prices for Nov, 19  was not adjusted in Feb 20 along with drop petroleum prices on an account of global headwinds as per research note of Arif Habib Limited.

However, on a yearly basis, the groups which led the inflationary pressure include Transport, Food, Alcoholic Beverages, and Health.

On the regional side, Urban CPI stood at 11.21% whereas rural inflation was recorded at 14.22%.

With regards to the inflation outlook, it is expected that inflation will remain March, likely supported by government decision to defer power and gas tariffs and declining international oil prices post the coronavirus outbreak. However, Ismail Iqbal’s research emphasized that the SPI data for the upcoming weeks would give a better picture of food prices.

Considering the dynamics of CPI reading, the anticipation of a policy rate cut has started to build up, to which the capital market has responded positively. However, Intermarket Securities expects that SBP will commence easing by May, with coming months of evident disinflation until the first-rate cut keeping the expected inflationary pressures in Ramadan. But the possibility of a rate cut in March cannot be ruled out on an account of improved CAD, lower international prices and ongoing global easing trend, highlighted by a research report of Alfalah Securities.

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