Mettis Global News
Mettis Global News
Mettis Global News
Mettis Global News

Trending :

Monetary easing – squeezing water from a stone?

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp

October 11, 2019 (MLN): The decline in market yields of PIBS following the auction held on September 25, 2019, created an uproar of excitement and anticipations amongst many investors. This excitement had largely to do with expectations that the State Bank of Pakistan would go for monetary easing in the next Monetary Policy Committee meeting scheduled for November.

Following these mounting expectations of a rate cut, market analysts suggested that drop in market yields of bonds may not actually result in monetary easing at least for now. Despite the fact that this drop in yields has pushed many investors towards equity instruments, a plausible easing in Monetary Policy is not expected as economy is not robust enough to afford a cut in interest rates at this point.

Going by the analysis done by Ismail Iqbal, monetary easing at this point would adversely impact the already disheveled macroeconomic indicators of the country. The analysis stated that the fiscal deficit is likely to remain high for the next few years, foreign exchange reserves are expected to remain static at a lower level whereas inflation is expected to come down to single digit by next year. Considering these factors, it is highly likely that the investors will have to wait until 3QFY20 to witness easing in policy rates, the report added.

Another reason why monetary easing might not be in the cards for now, is that the inflation might shoot up drastically in the coming months, owing to increase in the prices of electricity as part of the conditions imposed by IMF.

However, in the auction held for T-bills on October 9, 2019, we saw further decline in market yields. The 3-month rates stumbled by around 3 basis points (bps) to 13.69%, 6-month rates by 29 bps to 13.55%, and 12-month rates by 38 bps to 13.47%. These results have again paved the way for anticipations regarding a cut in policy rates.

It is pertinent to mention that since the auction held on September 13, the rates of 3-month T-bills have come down by 34 bps, 6-month by 40 bps and 12-month by 40 bps.

Speaking to Mettis Global on the aforesaid likelihoods, Mr. Fahad Rauf of Insight Securities said that decline in yields of T-bills and PIBs has more to do with demand-supply dynamics and less to do with inflation outlook.

‘Meeting with International Monetary Fund in December as well as the possibility of inflation shooting might create hindrances in the way of monetary easing’ he said.

He further backed his stance by stating that this aggressive participation in auctions has to do with the fact that government has managed to re-profile Central Bank debt into longer tenure and the lower demand in auctions for longer tenures is affecting the investor behavior.

Copyright Mettis Link News

Posted on: 2019-10-11T11:47:00+05:00

30484