Monetary Policy: What market expects and why?

May 26, 2021 (MLN): The State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) is scheduled to convene on Friday, May 28, 2021, to announce Monetary Policy for the next two months.

SPB has kept the policy rate unchanged for the past 11months to support growth in the aftermath of covid-induced lockdown and meet the demand gap of the economy. This time around, the outcome of the meeting is expected to be no different than the previous MPC meetings, as the policies of SBP are expected to accommodate economic activities in the medium term, despite running a negative real interest rate of around 2%.

In its last meeting, SBP noted that the sharp improvement has been witnessed in overall domestic recovery which has supported consumer and business confidence in the country. It also highlighted that the core inflation continues to appear restrained and although headline numbers have been inclining, inflation remains manageable. Moreover, inflation, as per SBP, is likely to hover within the 5-7% range in the medium term. In addition, healthy reserves position, manageable current account deficit, and stable currency are also providing cushion to maintain the expansionary monetary policy.

Besides economic indicators, the flat cut-off of yields in 6M tenor T-bills in the latest auction also signaling towards no change in monetary policy stance as the SBP borrowed accumulated Rs575bn, against the target of Rs500bn in the last auction held on May 19, 2021. The major participation was witnessed in the 6-month tenor in which they borrowed Rs325.5bn at a cut-off yield of 7.6%, inched up by 5bps, while Rs209mn were fetched in 3M papers at a cut-off yield of 7.35%, depicting no change from the previous auction. This implies that the interbank market participant also not expecting any cut in interest rates during the next six months.  

Market Consensus points to no Change

A survey of financial market participants conducted by Mettis Global Pvt Limited revealed that market consensus on policy rate also hasn’t changed drastically since the last monetary policy statement announced in March’21.

According to the survey results, 87% of the total participants are of the view that the SBP will keep the policy rate at 7% in May 28, 2021, monetary policy announcement. In total, 13% of the respondents are expecting a change in the policy rate.

Further bifurcation of this percentage shows that 10% of these participants expect a 50bps rate hike while the remaining 3% expect a hike of 25bps as the rising commodity and food prices at the domestic level have paved the way for monetary tightening. Speaking to Mettis Global News, Senior economist Muzammil Aslam has said that as there is a rise in inflationary expectations, a rate hike of around 25-50bps in upcoming monetary policy could be expected.


Going by the survey results, 98% of respondents are expecting a rate hike in FY22 mainly due to rising inflationary pressures. While surprisingly, 2% of the participants expect no hike in the interest rate during FY22. Of the 98%, 54% of the participants were of the view that SBP will increase interest rate later in the year 2021, while 44% of the participants expect that rate hike will start gradually in CY22.


Senior economic expert at Topline Securities, Saad Hashmi also expects no change in policy rate at least for CY21, however, Raza Jaffery, Head of Research at AKD has said, “at the moment economy seems stable, and a change in policy rate could come in November’ MPC meeting.”

The Covid-19 pandemic has shaped the new concerns of balance between commodities demand and supply. The rising supply gap has further pushed prices upward. At the start of the pandemic, the commodities’ prices took the nosedive however, the recovery in economic activities and production escorted the price surge. After entering double-digit (11.1%) in April’21, the headline inflation is expected to stabilize at the current level, where the major increase is expected from the food segment. In addition, a further adjustment in electricity tariff under the IMF program will further push inflationary pressure. However, the recently joined Finance Minister emphasized the need to renegotiate such stringent recommendations with IMF in order to support still half-cooked demand.  

The survey results show mixed expectations regarding inflation outlook as 50% of the respondents expect inflation to remain within SBP’s target of 7-9% in FY21, while 50% believed that inflation will hover slightly above SBP’s mark.

External Account and GDP Growth Rate

Pakistan, being an import-driven economy, the country’s external account position plays a vital role in assessing appropriate monetary policy. Subdued local demand, unprecedented and spiraling jump in remittance flows, heathy reserves position as it is floating around USD23bn mark, have contributed to restricting the Current Account Deficit (CAD) at manageable levels. It seems quite certain that Pakistan is likely to end up with a Current Account (CA) surplus this fiscal year of around USD607mn. This surplus comes after a gap of 10 years, last witnessed in FY11 of USD 214mn., a report by Arif Habib Limited cited. To note, SBP expects CAD to clock in below 1% of GDP for FY21 due to strong remittances and high value-added textiles-led exports.

Going forward it is anticipated that the current account may face some pressures owing to a rise in import bill due to machinery imports as a result of SBP’s TERF facility for BMR and rising food-related imports (i.e., wheat/sugar). Nevertheless, as we are entering into a new FY with a good economic footing; potential inflows from IMF, Eurobond Issuance, remittances, FDI, and RDA will balance such risks. In a survey, 50% of the participants believe that Pakistan’s current account will close FY21 with a surplus, while 31% of them expect the opposite of it. Moreover, 19% were uncertain.  

On the GDP front, the government has set a GDP growth target for FY21 at 3.94% largely on the back of thumping revival in large-scale manufacturing (9MFY21 LSMI: up 9% over SPLY) and a surge in overall economic activity due to limited lockdowns and contained incidence of the 3rd pandemic wave. For FY22, the Government is targeting 5.2% GDP growth, aiming to achieve over 6% GDP growth by FY23. As the country’s estimated GDP outperformed the forecasts of the World Bank (1.3%) and the International Monetary Fund (1.5%), most of the analysts expect GDP growth projection to be over 4% for the fiscal year 2021 due to anticipation of higher growth in 4QFY21. In a survey, 44% of the participants were of the view that the final GDP for FY21 will settle above 4% as the situation of COVID 19 is getting better and economic activities are turning back to the pre covid period.

While speaking to Mettis Global News, Raza Jeffery predicted GDP growth in between 4-5% for FY22, however, Muzammil Aslam said it could go around 5% by the end of this fiscal year. “For FY22, I see it reaching 6-7%,” he added.

With regards to PKR/USD parity, the market is anticipating it to remain in a stable zone at least for a year or so. Syed Noman Ahmed, Head of Research at Insight Securities is expecting it to reach around Rs165/USD by end of FY22. Similarly, Raza Jaffery projected it to reach around Rs160-170/USD. Meanwhile, it is important to note that any appreciation of the Rupee would put further pressure on exports.

Copyright Mettis Link News




Posted on: 2021-05-27T23:38:00+05:00