Monetary Policy Expectations Survey

The State Bank of Pakistan is scheduled to announce its monetary policy decision tomorrow, on July 14^th 2018, for the next two months. The announcement comes much sooner than what could be expected under normal circumstances. The urgency comes on the back of a dire need to raise funds along with the upcoming election on July 25^th 2018.

Market consensus seems to be pointing to a rate hike of between 50 to 100 basis points. This expectation is primarily driven by multiple challenges on the macroeconomic front. A widening current account deficit, depleting foreign exchange reserves, the recent devaluation of rupee against the dollar, and rising inflation all point in the same direction.

Speaking to Mettis Global Link News, Rukhsana Narejo, Head of Treasury at Sindh Bank Limited, said that she expects a rate hike of between 50 to 100 basis points but was leaning more towards the lower end as an increase of 1% could be troubling for market participants.

“Economists are expecting the rate hikes to reach between 2% to 2.5% by June, 2019,” she added, going on to say “the State Bank might even consider altering the Cash Reserve Ratio (CRR) in the foreseeable future.”

Analysts seem to hold the same opinion, as pointed out by Zeeshan Afzal of Insight Securities who expects the interest rate to increase by 1%. “Commercial banks have been unwilling to lend to the government as can be seen through the recent results of PIB auctions where the government was only able to generate about Rs 350 billion against a target of Rs 1.9 trillion, running a deficit of close to Rs 1.55 trillion.”

“What is more interesting is that there are going to be further PIBs and MTBs maturing in the coming days, which is why a rate hike is going to be necessary if the government is to incentivize the commercial banks to participate in these auctions and help them raise the funds required,” he added.

Sunny Kumar, research analyst at Spectrum Securities, also expects the policy rate to increase by 50bps to 100bps. “Recent rupee devaluation would curtail current account deficit going forward, regardless we expect SBP to increase policy rate to maintain interest rate parity,” he said.