September 18, 2020 (MLN): The wait-and-see stance is expected to be well maintained by the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) in its meeting which is scheduled to take place on Monday i.e. September 21, 2020.
The SBP in its upcoming meeting is expected to maintain status quo, holding the benchmark policy rate unchanged at 7%.
The main reason for status quo stance in upcoming monetary policy is the normalized inflation outlook as CPI is expected to remain within the SBP’s target range of 7%-9% for FY21, on account of higher base effect and lower oil prices.
Moreover, considering absence of demand side pressures, major slowdown in business activity post covid-19, stable current account position and a risk of a second wave of virus, the MPC may continue to hold the negative real interest rate for now.
Since March 2020, when the economy had faltered under the effects of Covid-19 pandemic, with economic activity ending, the SBP came up with the most aggressive central bank in terms of a rate cut as it reduced 625 bps since March-2020
To recall, the monetary policy statement for July had been delayed by the SBP as the regulator did not feel the urgency to take further action over the prevailing economic challenges rather than preferred to adopt wait and see approach for any change in the interest rate.
The recent surplus of $424 million in current account due to surge in remittance to a record US$2.8 billion, which was up by 36% YoY and 12% MoM, would also contribute to the maintenance of the status quo stance on policy rate. Although this is a short-lived phenomenon as the remittances flow through official channels will slow down once international travelling takes up again and cash carriage reconvenes. Additionally, the rising unemployment in source countries is also expected to soften remittances flows going forward.
However, with international oil prices remaining under pressure amid general slowdown in economic activity and with flexible exchange rate regime, country’s current account balance is expected to remain strong. To highlight, the current account deficit has been consistently depicting a declining trend over the last two years as it stood $2.9 billion in FY20 against $13.4 billion and $19.1 billion in FY19 and FY18 respectively.
Moreover, the strong external account position will also help PKR to stand firm against greenback, which will push imported inflation back.
In addition, taking clue from the recent auctions of government securities i.e. T-bills and PIBs, where cut off yield remained stable, also pointing towards a status quo.
Lastly, the expected status quo in the policy rate stance is further strengthened by the survey conducted by Arif Habib Limited, in which the brokerage house took feedback from various sectors such as Banks, AMCs, Insurance, DFIs, E&Ps, Cement, Fertilizer, Steel, Textile and Pharmaceuticals about the upcoming monetary policy.
According to the brokerage house, 83% of the total respondents are of the view that the SBP will keep the policy rate unchanged in September’s MPS., while 17% of the total respondents see a rate cut, whereas, none of the respondent expects a rate hike in September’s MPS.
Copyright Mettis Link News
