Lower CPI opens door for further rate-cut in testing times?

April 02, 2020 (MLN): The consumer price inflation dropped to 10.24% YoY in March’20 from 12.40% YoY in February’20, in line largely with market expectation, taking it down to its lowest inflationary reading in eight months. This brought the 9MFY20 average inflation to 11.53% against 6.31% of the corresponding period of the last fiscal year.

Monthly inflation remained muted as it witnessed a meager increase of 0.04% MoM in March’20 when compared to 1.04% MoM during the preceding month, showing that March reduced inflation reading provides an improvement in consumer purchasing power, keeping it at a decent level.

Inflation was brought down in March’20 primarily by Transport Index as a substantial overall downward impact came from a cutback at local prices of petroleum products following the drastic reduction in international crude oil prices by around 50% MoM. Similarly, transport services also fell by 5.45% MoM, with another likely impetus being the lockdown amid COVID-19 spread, resulting in lower demand.

The muted growth in housing group and food inflation on the back of lower wheat prices also contributed to softer CPI reading. However, clothing and footwear restricted the downward impact.

According to the research note by JS Global, another positive indicator that kept inflation on a lower side was the Wholesale Price Index (WPI) which increased by 9.2% YoY, the first time since May-2018 that WPI returned to the single-digit territory.

According to the research by Foundation Securities, on the regional side, Urban CPI went up by 0.13% MoM whereas rural inflation came down by 0.10% MoM during March’20.

With regards to the inflation outlook, it would not be surprising if CPI returned to single-digit territory in April as the full impact of petroleum price cut is yet to be reflected on inflation number, higher base effects coupled with lower MoM increase in house rent on slowdown economic and business activities amid COVID-19 crisis, anticipated by market analysts. However, an unexpected increase in food prices due to supply disruption during ongoing lockdown especially in Ramadan cannot be ruled out.

Furthermore, in such a testing time of lockdown with limited opportunities for daily wage earners, it is interesting to see if the government makes decisions to import food items during lockdown for continuous supply while keeping prices stable, JS research specified.

Going forward, the inflation readings of March gives State bank of Pakistan ample scope to cut interest rates if the economy fails to cope up with the ongoing crisis. As per the research of BMA, weak energy and food prices amidst signs of weakening domestic demand make a strong case for another 100 bps.

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