Following the slowdown in food inflation amid expectation of better food produce, seasonal affects especially in farm products coupled with some relief from motor fuel prices, including LPG and Diesel on MoM levels, the CPI for Feb 2013 is expected to rise by 0.24 per cent monthly and 8 per cent annually.

This would conclude the first eight months of FY13 with an average YoY inflation of 8.26 per cent staying largely within expectation of 8.75 per cent for FY13, experts from BMA Capital observed.They said that contrary to Jan 2013, where MoM inflation jumped by 1.67 per cent primarily due to increase in wheat prices (support prices increased by 14 per cent per 40kg), the food inflation in Feb 2013 would largely remain muted.

This can be attributable to seasonal decline in farm product prices (chicken and eggs) and 1 per cent MoM decline in wheat product prices (4.2 per cent weight in CPI basket) in anticipation of a bumper wheat crop. Moreover, apart from food index, 5?6 per cent decline in monthly fuel prices (LPG and diesel by 14 per cent and 1.0 per cent respectively) would also lend its due share in a meager 0.24 per cent MoM increase in CPI inflation.

This would conclude 8MFY13 with an average YoY inflation at 8.26 per cent, which accounting for the expected increase in next four months will conclude the FY13 average inflation at 8.75 per cent (our base case).A financial expert Furqan Punjani, observed in a report that the inflation for the outgoing month will be contrary to the investors’ expectation that headline inflation in 2HFY13 would increase quite significantly compelling the central bank to refrain from any further cuts.

Though he agrees with the contention that State Bank of Pakistan (SBP) will not reduce the discount rates any further from the current levels of 9.5 per cent, the status quo in next MPS would be on the back of reentry into IMF Program which would compel the government to reduce current spending and borrowing from central bank and central bank’s view to reduce the OMO amounts hence reducing the liquidity from the market but not inflation levels.

To mention, since the indication by SBP to reduce the OMO amount, the government paper yields of different maturities has increased by 6195bps. With this the spreads between DR and secondary market yields have further gone up to 180262bps, indicating an increase in DR going forward post IMF.

Moreover considering the current MoM inflation and not factoring in any abrupt change in price pressures (passing on electricity tariff subsidy to customers as desired by IMF in the first year of program), the FY14 average YoY inflation will conclude at 9.5 per cent and 10 per cent, hence leading to a 100-150bps increase in discount rates, taking cue from the real rate saga of IMF.