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Monetary Policy Outlook: Status quo likely to be maintained

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State Bank of Pakistan, Mr. Tariq Bajwa is to announce the MPS today(Friday) at the SBP Headquarters. Central bank monitors the macroeconomic factors impacting the economy in an effort to direct the future course of economy by adjusting the rates.

Decline in food prices offset depreciation impact of Energy Prices, inflation to clock in at 4.68% in Jan’18

An in-depth analysis of Inflation will reveal the dynamics impacting today's policy rate decision. Average inflation during the fiscal year 2017 clocked in at 4.15%, with highest at 5% during May. Research and Brokerage houses anticipate month on month inflation for January to clock in at 0.29% on average.

Currently, average inflation for the first six months of fiscal year 2018 is at 3.75% below the average of same period last fiscal year which was at 3.88%. Based on analysts expected inflation for the month of January, average CPI (4.68%) for the period between July to January is to be at 3.88% against 3.85% during same period last year.

Zoya Ahmed of AKD Securities is of the opinion that, “headline inflation to clock in at 4.8% year on year in June, 2018”. Mentioning the seasonal dip in perishable food items, she writes “increase in petroleum prices (MOGAS/HSD: up 5.3%/4.4%MoM) along with cyclical uptick in housing rent should result in higher inflation reading.” Inflation has been climbing at a steady pace during the 1H of fiscal year 2018, “going forward, inflation is expected to rise gaining strength from higher price levels for food items in line with season trends, rising global oil prices, recent currency devaluation.”

Commenting on a question regarding the trend in the money markets, she said that “Investors are exercising a wait and watch approach at the moment, as they anticipate two rate hikes during 2018 keeping in view the pace of inflation.” She mentioned the investors will continue to remain reluctant in investing in long-term, “majority of bids will remain concentrated in the 3 month instruments.”

Monetary Policy Outlook: Status quo

Reviewing the inflation trajectory over the course of last seven months, CPI continues to stay below SBP target of 6%. State Bank’s MPC decided to keep the policy rate unchanged in previous meetings quarters, “this cautiously accommodative stance was meant to ensure the persistence of the favorable investment climate in the country. Coupled with comfort on the inflation front, unchanged stance was a deliberate attempt by MPC”, explained an SBP Report.

“From the current trend in macro factors, it is highly likely that Central Bank will not change rate in the Fiscal Year 2018”, commented Mr. Shoaib, Executive Director at Bright Securities. The current pace at which inflation is growing, it seems highly plausible that Central Bank will change rate in fiscal year 2019.

The same stance was reiterated by Ms. Zoya Ahmed of AKD Securities, who mentions that “inflation has recently gained momentum, it remains well within the target … the impressive growth in the private sector credit (20% year on year in first half of fiscal year 2018) could be another deterrent in this regard, further strengthening our case for an unchanged policy rate.”

External Front Woes

“On the external front, Pakistan faces numerous pressures and the situation continues to deteriorate with every passing week, despite a positive remittances inflows and a decline in trade deficit”, mentioned Ms. Rukhsana of Sindh Bank.

The Government recently made an announcement that it has no plans to approach International Monetary Fund, and seeks to raise funds by another Eurobond issue in the international markets. The details of which have not be revealed yet.

The Government’s maturity profile in the upcoming quarter is extremely tight and the situation in money markets could become quite tricky for the finance team in the coming few months. Government has to pay a total of around Rs. 3.47 trillion during the 3rd quarter of FY ‘18. With another payment of Rs. 1.091 trillion at the start of 4th quarter in fiscal year 2018. Pakistan’s domestic maturities during the next four month translate into $ 4.12 billion ($ ~ 110.50). Furthermore, the target set by Government for the third quarter of fiscal year 2018 is at Rs. 2.750 trillion in T-Bills and a 100 billion is expected to be picked up from the PIB Auction. However, recent trend shows investors are unwilling to invest in long terms PIBs and or 6 and 12 month T-bills, forcing government to raise the entire amount from 3 – month T-Bills. 

Mr. Shoaib mentioning the upcoming maturities said, “The coming quarter is going to be extremely tight, Government is in desperate need to raise funds. According to reports, Government is currently looking to raise $ 2 -3 billion worth of funds from another Eurobond issue.” Pakistan similar to its efforts and steps in order to resolve the structural issues in the Energy and Security sectors must also introduce some reforms that target the twin – Trade & Current Account – deficits.

Ms. Rukhsana mentioned the need for long term structural reforms to fix the external woes, “Maybe some inflows will come from CPEC related projects in 2018, Government might even raise a few billion to resolve the problems in short term but in the long run Pakistan will have to deal with this issue with a resolve”.

After consulting numerous brokerage houses, the market consensus for CPI numbers is expected to remain somewhere between 4.5 – 5.0%. On the policy front, the MPC is expected to maintain the status quo due to lower inflation pace and to continue with expansionary economic direction in an effort to support GDP growth. The structural reforms carried out to fix the security conditions, better energy supply mechanisms coupled with the interest rate stability have helped the government achieve economic growth of 7.19% year on year during the first five months of fiscal year 2018. 

Posted on: 2018-01-26T12:29:00+05:00