Inflation in Pakistan declined significantly in FY15, averaging 4.56% compared to 8.62% in the previous fiscal year. This was driven by lower fuel and food inflation as well as stable exchange rates. Core inflation also trended downward, reaching 4.6% YoY in June 2015. However, inflation is expected to rise to around 6.2-6.5% in FY16 due to budgetary measures, higher energy prices, and increasing demand as interest rates fall. The central bank may cut rates further to 6.5% in July given lower recent inflation, but inflation is forecast to increase in the second half of FY16, potentially reversing monetary policy.

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Benign inflationary trend continued towards the tail‐end of FY15 with CPI for Jun’15 at
3.16%YoY, bringing average inflation for FY15 to 4.56% compared to 8.62% last year.
The notable decline in inflation can be attributed to i) deflation in fuel inflation leading
to its trickle down positive impact on the economy, ii) tamed food inflation at 2.4%YoY,
and iii) muted imported inflation on account of stable exchange rate. On a sequential
basis, monthly inflation reading came as a positive surprise with MoM expansion at
0.6% in stark contrast to SPI readings which expanded by 2.1% over the past five weeks.
The lower than expected inflation came on the back of a deflation of 2.2%MoM in
perishable food items. In FY16, inflationary pressures may potentially emanate from
cost side in the wake of budgetary measures coupled with upward adjustment in
administered energy prices. In this regard, inculcating an average monthly inflation of
0.7%, headline inflation may potentially clock in at ~6.2‐6.5% in FY16, squeezing
effective real interest rate to 50bps (considering prevailing DR of 7.0%) vs. current
spreads of 350+bps. However, recent inflation numbers may potentially provide an
opportunity to the central bank to further reduce the DR by another 50bps to 6.5% in
upcoming MPS. That said, we flag a real risk to the sustainability of lower DR
particularly towards the end of CY15 where expected reversal in inflation during 2HFY16
will potentially result in a reversal in the monetary policy stance.
FY15 Inflation Review: FY15 ended on a positive note where headline inflation for Jun’15
clocked in at 3.2%YoY, lower than broad market consensus. At the same time, the reading
was significantly lower than 8.2%YoY registered in Jun’14. This has taken FY15 average
inflation to 4.56%, in‐line with SBP and BMA expectation of 4.6%. FY15 proved to be an
exceptional year where monthly CPI reading dipped to a decade low reading of 2.1%
registered in Apr’15. The notable improvement in domestic inflationary environment can
be attributed to i) decelerating fuel index (CPI weight: 3.0%) by 17.3%YoY, contributing
0.52% in overall CPI basket on the back of global meltdown in crude oil price (Arab Light
down by 45%YoY), ii) soft commodity prices due to better domestic output and supply
situation coupled with benign global commodity prices, iii) tamed increase in money
supply which expanded by 10.1% during FY15 compared to 12.25% in the preceding year,
and iv) lower imported inflation due to stable exchange rate followed by lower oil import
bill.
On a sequential basis, CPI accelerated by 0.6%MoM, 35bps higher than 12month moving
average of 0.26% due to i) uptick in food basket, up 0.61%MoM owing to the increase in
prices of non‐perishable food items, ii) a whopping increase of 13.3%MoM in alcoholic
beverages and tobacco basket in the wake of budgetary measures, and iii) transport
segment increased by 1%MoM due to higher fuel index, up 2.7%MoM. That said,
favorable base effect has contained overall inflation to 3.16%YoY.
Core inflation; following a downward trajectory: Following sliding headline inflation,
Non‐food and Non‐energy (a measure of core inflation) remained on the downward
trajectory with latest reading clocking in at 4.6%YoY, having receded for 10 consecutive
months now. In addition, trimmed core inflation stood at 3.8%YoY in Jun’15, down from
3.9%YoY and 7.9%YoY recorded in May’15 and Jun’14, respectively. The marked
improvement in core inflation is primarily a function of stable exchange rate coupled with
Pakistan Economy
Thursday Jul 02, 2015
FY15 inflation review and outlook
Select Economic Indicators
CPI Inflation Jun‐15 YoY 3.2%
SPI Inflation Jun‐15 YoY 1.2%
NFNE Inflation Jun‐15 YoY 4.6%
Reserves 01‐Jul‐15 USD18.5bn
Remittances 11MFY15 USD16.6bn
Trade Balance 11MFY15 USD(15.5bn)
Current A/c deficit 11MFY15 USD(2.0bn)
6 Month KIBOR
(Offer Rate)
30‐Jun‐15 7.0%
10 Year PIB 30‐Jun‐15 9.4%
Discount Rate 7.0%
Percentage points contribution in CPI basket
Inflationary Trends
Iqbal Dinani
Iqbal.dinani@bmacapital.com
+92 111 262 111 Ext:2059
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Aug'02
Jul'03
Jun'04
May'05
Apr'06
Mar'07
Feb'08
Jan'09
Dec'09
Nov'10
Oct‐11
Sep‐12
Aug‐13
Jul‐14
Jun‐15
‐5.0%
0.0%
5.0%
10.0%
FY15 FY14 FY13
Non‐perishable Food Perishable Food
Clothing & Footwear Furnishing & Household
Transport Housing and Utilities
Others
Source: PBS, BMA Research
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bearish global commodity prices which led to a decline in the domestic prices (excluding
oil and food).
Inflation and DR outlook FY16: Going forward, we expect upward pressure on inflation in
FY16 due to rising retail prices post implementation of Federal Budget FY16, upward
revision in administered prices and expected increase in aggregate demand due to sliding
benchmark interest rates. Thus, we expect FY16 average inflation to clock in at 6.2%‐6.5%,
incorporating monthly inflation of 0.7%. Given below expected inflation reading for Jun’15
and subsequent expected soft inflation in 1HFY16 to 4.2% due to high base effect, the
central bank may potentially pursue a dovish stance in its upcoming MPS which is due in
Jul’15. Therefore, we may surprisingly observe Discount Rate hitting a new low of 6.5%
(down 50bps from prevailing 7.0%), contrary to our earlier expectation of status quo.
However, we flag a cautious stance on inflation outlook as we foresee it to spike
northwards in 2HFY16, leading to a potential reversal in monetary policy stance by SBP.
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