Interest rates to be raised: Monetary Policy Expectation Survey

September 28, 2018 (MLN): Ahead of the upcoming decision on the monetary policy announcement by the State Bank of Pakistan, majority of the market’s expectations appear to be inclined towards a potential increase of 50-100 basis points in the key policy rate. 

The State Bank of Pakistan (SBP) is scheduled to announce its monetary policy decision tomorrow, i.e. September 29th 2018.

In a survey of the interest rate expectations of 15 financial institutions in Pakistan, 13 institutions believe the policy rate to increase within 50-100 basis points, with six expecting the policy rate to go up to 8 percent, six expecting 8.5% and one expecting it to go up to 8.25%.

Research analysts believe that the Monetary Policy Committee (MPC) will most likely take a proactive stance in setting the benchmark interest rate on fear of rising inflation within the country, given the recent hike in gas prices and its repercussions.

The State Bank of Pakistan had at the time of the previous policy rate hike in July revised its inflation target, measured by the Consumer Price Index (CPI) to 6%-7% for the Fiscal Year 2018-19 as opposed to its earlier estimation of 5.5%-6.5%. Revision of the inflation target came around mainly due to the impact of rupee devaluation and the high current account deficit (CAD) of the country.

According to a research report by Spectrum securities, the monetary policy will rise by 50-75 bps, on account of a rising trend in the headline and core inflation, widening current account deficit (CAD), depleting foreign reserves and rise in international commodities prices that would exert further pressure on the balance of payment.

Mr. Yawar-uz-Zaman at Shajar Capital however believes that SBP will not raise the policy rates radically. In conversation with a representative of the Mettis Link News, he said that since SBP has only recently increased the policy rate by a 100 bps, the establishment will wait for the full impact of its previous decision and will increase the policy rate by around 50 basis points instead of making an aggressive decision.

In a research report written by Mr. Zaman, he pointed out that the average CPI for the previous two months stands at 5.84%, and he expects it to drop to 5.27% in September’18. Therefore he believes that SBP does not need to raise the rates drastically.

The need to pursue a rate hike has also been forecasted by Fitch Solutions that deems the measure necessary in light of the ‘overheating’ economy of the country, which it pointed out in a research report released on Thursday, while maintaining its downgraded growth forecast for Pakistan’s real GDP at 4.7 percent in the fiscal year 2019 and to 4.3 percent in the fiscal year 2020, from 5.8 percent in the previous fiscal.

Copyright Mettis Link News

Posted on: 2018-09-28T23:13:00+05:00

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