November 21, 2019 (MLN): The State Bank of Pakistan is slated to announce the Monetary Policy Rate on Friday, i.e. Friday, November 22, 2019. In this regard, a number of brokerage houses have come forward with their expectation of the policy rate, with the majority of opting for the rate to remain unchanged at 13.25.
According to the research reports released by these brokerage houses, these expectations are backed by several factors, such as the high likelihood of a rise in the inflation rate, decline in Current Account Deficit and rise in Real Effective Exchange Rate (REER).
Speaking of the rise in inflation, the Pakistan Bureau of Statistics is scheduled to announce the Consumer Price Index (CPI) figures for the month of November in the first week of December. The general consensus of market spectators suggests that inflation is likely to move further up on the back of an increase in prices of food index. Apart from that, the rise in demand for gas and fuel due to the start of winter season may exert further pressure on the CPI.
The direction of change in Monetary Policy rates also depends on the yields of PIBs and T-Bills. In the auction that was held yesterday, the cut-off yield for 3 and 12 months surged by 30bps and 46bps respectively. This rise in yields may prevent SBP from curtailing interest rates as the Government is planning to boost its foreign reserves by issuing T-Bills with higher yields. Hence, it is likely that the SBP’s decision regarding Monetary Policy will largely be in line with the Government’s motive of getting more funds, and this can be achieved only if the policy rate remains unchanged.
It is interesting to note that most of the brokerage houses had a similar stance on Monetary Policy even when there was a decline in market yields of PIBS during auction held on September 25, 2019. Even though this resulted in an uproar of excitement amongst many investors, who took it as a cue for a potential easing in monetary rates, the market analysts suggested that drop in market yields of bonds may not result in monetary easing as the economy at that point was not robust enough to afford it.
A report by Al Habib Capital Markets pointed out that the rise in REER from 88.1251 in June 2019 to 98.023 in October 2019, may pressurize the SBP to not cut policy rates, as it might lead to further depreciation of the local currency.
A very important consideration rightfully pointed out by most of the research houses is that monetary easing would have an adverse impact on the Current Account Deficit. The CAD showed tremendous improvement in the last few months, and transformed into a Current Account Surplus in October 2019, on the back of the rise in exports, an increase in remittances and a fall in imports.
Contrary to the expectations put forth by majority of the brokerage houses, BMA Capital suggested that there would be in fact a cut of 50bps in the policy rate. Speaking on the same to Mettis Global, Mr. Saad Hashmi from BMA Research said that inflation is expected to go down in the coming months, owing to the stability in PKR. He also attributed the expectation of an improbable rate cut to declining yields since the auction held in September 2019.
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