Monetary Policy: An open invitation to further tightening?

May 17, 2019 (MLN): The State Bank of Pakistan is scheduled to announce the Monetary Policy Rate for the next two months, on May 20, 2019. Keeping in view the inflationary pressures, recent rupee devaluation, as well as swelling current account deficit, the Central Bank is expected to raise the Policy Rate by 100 bps to 11.75%.

Pakistan's Yearly Inflation rate in April saw an ease as it was recorded at 8.82 Percent, as compared to 9.41 percent in March 2019. However, the inflation for the month of May is still expected to rise keeping in view the figures of Sensitive Price Indicator (SPI), which increased by 1.16% during the week ended May 9, 2019.

Even though the IMF in its official statement called for a reduction in inflation rate, the interest rates are nonetheless likely to follow the opposite route. This is because a plan for cost-recovery in the energy sectors and state-owned enterprises to help eliminate the quasi-fiscal deficit, as inculcated by IMF, will necessitate a rise in the prices of gas and electricity, giving further boost to inflation.

Supporting the aforementioned prediction, the following brokerage houses have put forth their anticipations of the upcoming Monetary Policy Rate, with majority of them opting for around 100bps increase in interest rates.

Speaking to Mettis Global News on the significances of an imminent hike in interest rates, Mr. Zeeshan Azhar from Foundation Securities said that the ultimate impact on the economy will comprise of a fall in inflationary pressures, as well as Current Account Deficit via curtailed imports.

Shedding some light on the dimmer side, he said that a hike in policy rate will clearly result in lower lending by banks, which will circuitously hinder the growth of economy. In addition to this, investors would be more inclined towards fixed income markets rather than the equity markets, which will result in further corrosion of stock markets.

AKD securities has rightfully pointed out a crucial point regarding the timing of the Monetary Policy announcement. Normally held at the last week of every month, it is uncanny that the Central Bank is holding the meeting almost 10 days prior to the month end. The plausible motive behind this move could be to increase market participation in the upcoming T-bills and PIBs auctions, which are to be held on May 22nd and 29th respectively.

Keeping in perspective the performance of T-Bill and PIB auctions from 30^th April to date, we can easily outline a rising trend in yields on these instruments, which highly suggests that market is expecting an increase in the Policy Rate.  

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