- There were no surprises in the Mar inflation data. Headline inflation continued to ease as
expected, moderating from 2.2% in Feb to 2.1% yoy in Mar (OSK and consensus:
2.1%). In Mar, food prices (the largest component in the CPI basket at 30%)
rose by 2.9% yoy, unchanged from Feb, while housing and transport cost (38%
combined weightage) moderated a tad by 1.8% and 1.3% respectively from 1.9% and
1.4% in Feb. The rest of the components in the CPI basket also rose at a slower
pace in Mar as compared to Feb, with furnishing and healthcare costs being the
exception.
- We think that inflation should moderate for the full-year
on the back of base effects, coming in at 2.7% versus 3.2% in 2011. However, there are upside risks to our
forecast, particularly from the impact from civil servant pay hikes, fuel
subsidy cuts (probably coming after the general elections) and implementation
of minimum wage. These could add 100-150
bps to our baseline forecast.
- As for policy, we expect the easing inflationary trend to
provide some room for the central bank to keep policy rates on hold for at
least the first half of the year. We
think that rate cuts are not likely unless the external environment
worsens. However, given the build-up in
inflationary pressure on the back of strong public spending and private
consumption, as well as the possible further upside to inflation (as discussed
above), the bias is tilted towards the normalization of rates. We think that a hike of at least 25 bps in
the OPR sometime in the latter half of 2012 is possible.
Source: OSK188
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