The Consumer Price Index (CPI) inflation nose-dived to, what economic observers say, an 11-year low during January 2015, paving the way for further monetary easing by the State Bank of Pakistan (SBP) in the months ahead. Also, a consistent ease in otherwise backbreaking inflationary pressures in the country is expected to help the sentiments-driven Karachi stocks market peaking to new highs.
Monday saw KSE 100-share index gaining 232.4 points to close at record 34,676.31 points. A 100 basis points rate-cut by the central bank on January 24 was seen as a major catalyst for the benchmark index that grew by 7.2 percent, Month-on-Month, during January to close at 34,443.87 points on Friday last week. Expected to stand in line with the central bank's revised target of 4.5-5.5 percent by end-FY15, the country's headline inflation rate clocked in at 3.8 percent during the just-concluded month compared to 4.3 percent of the preceding month (December 2014).
The price hike during the first seven months of current financial year, July-JanauryFY15, stood at 5.8 percent as against 8.8 percent of the corresponding period of FY14. A month-on-month account, however, depicts 0.08 percent hike compared to 1.0 percent decrease in December (2014). Analysts at Shajar Research attribute this meager increase to a likely adjustment in the house hold rent.
"Decline in inflation is mainly due to lower fuel inflation thanks to falling global oil prices," viewed Topline analyst Umair Naseer. To Shajar analysts, lower petroleum, food and vegetable prices in domestic market could constitute likely reasons for the 'significant' downfall in inflation numbers.
Umair anticipates inflation to touch 5.3 percent in FY15 compared to 8.6 percent of FY14. Those at Shajar Research estimated it to average at 5.1 percent, "in line with SBP's revised target of 4.5-5.5 percent". With available numbers, he said, the real interest rates now stand at 4.6 percent in February 2014 as against 2.0 percent in January 2014 and historical average of 1.8-2.0 percent.
Going forward, Umair said a southward trend in international and local oil prices and lower food prices would keep the otherwise backbreaking inflation in check. "We expect (the) SBP to further cut policy rate by at least 50 basis points in 2015 due to falling inflation," the analyst said.
The central bank in its last monetary policy slashed the discount rate by 100 basis points to 8.5 percent citing easing inflationary pressure and improving Balance of Payment position of the country as major attributable factors for the significant rate-cut.
"(The) possibility of further monetary easing can't be ruled-out in next MPS," opined InvestCap analyst lrfan Saeed. Further downward revision of the SBP's policy rate is bound to make the country's booming thus heavily-yielding stocks market an attractive investment destination for the profit-conscious investors.
The KSE index, the market analysts observed, climbed by 2,313 points during the month of January mainly, as Saeed said, on account of investors' anticipation for a significant cut in the discount rate. The stocks observers, however, are keeping an eye on current volatility in international crude oil prices that, coupled with a 'poor' results announcement session, might upset the ongoing bull-run at Karachi bourse. "The performance of heavy weight oil sector would depend on international oil prices, going forward," said Saeed.
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