March 28, 2019 (MLN): With the end of this month drawing close, all eyes have turned to the State Bank of Pakistan in anticipation of its next move regarding Monetary Policy for next two months, which is expected to be announced tomorrow, March 29, 2019.
In its previous announcement, the Monetary Policy Committee (MPC) took the markets by surprise when it announced another hike in policy rate, thereby pushing it up to 10.25%.
It is pertinent to note here that the year-on-year consumer price inflation for February 2019 increased by 102 bps over the month and was recorded at 8.21%. On the other hand, the weekly SPI numbers in March point towards potential rise in inflation for the month, as prices of perishable food, clothing and motor fuel rose notably.
Moreover, the secondary market yields have expanded significantly in the last few days.
Together, these trends signal towards another policy rate hike for the next two months.
Supporting this argument, several brokerage houses in Pakistan have put forward their forecasts with the majority pointing towards a potential rise of 50-75 bps.
Policy Rate Forecast
Change – basis points (bps)
Arif Habib Limited
Al-Habib Capital Markets
10.75% – 11%
10.75% – 11%
10.75% – 11%
10.50% – 10.75%
Ismail Iqbal Securities
In a survey of twelve brokerage houses, all have unanimously predicted further contractionary stance by central bank, with the exception of BMA Securities which believes that policy rate shall remain unchanged.
When asked for her take on the matter, Ms. Humaira Akhtar, Vice President of Research Department at BMA Securities told Mettis Link News that, “Our view of status quo in upcoming review is based on the future direction of CPI (average CPI of 6.9%), level of real interest rates (current real interest rate of 200bps set to widen to 280bps by Jun’19 at current policy rate) and counter-productive nature of increase in rate on other macro variables, particularly on fiscal deficit, whereby every 100bps increase in policy rate adds PKR80-90bn gross burden on fiscal deficit given current stock of debt (net impact could be PKR70-80bn).”
Adding on, she said that, “While we eye a possibility of 25bps hike in policy rate, we believe the same may occur in next policy review, leading to policy rate peaking at 10.5%.”
Bearing past events in mind, BMA’s projections hold fair weightage given that central bank’s previous decision was in fact taken after deliberation on future inflation expectations, level of real interest rate against the economic cycle, and the position of current account deficit and fiscal deficit; in short the indicators that BMA has focused on.
However, with an IMF agreement lurking around the corner and a mandated removal of gas and electricity subsidy, the inflationary pressures are expected to rise in future. Not to forget, the government is also currently contemplating a further hike in gas tariff, spurred by SSGC and SNGPL.
In the last MPC meeting, the members (3 members) who endorsed maintaining status quo, to wait for impact of past increases in key rates to kick in, were outnumbered as the majority (5 members) voted for a hike keeping in view the current and future economic difficulties.
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