Mettis Global News
Mettis Global News
Mettis Global News
Mettis Global News

Trending :

MPS: A sensible move

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp

April 10, 2022 (MLN): To counter external shocks and price stability, SBP has increased the policy rate by 250bps to 12.25% in an emergency meeting held on Thursday, April 07, 2022. With this, real interest rates have now moved into the positive territory after almost two years.

This is a quick, wise and decisive move by SBP in the backdrop of raging political uncertainty prevailing in the country, rapidly slithering PKR, depleting forex reserves, higher global commodity prices particularly oil, and a massive increase in domestic food prices.

SBP had already highlighted in the previous MPS that it would continue to closely monitor the economic variables and fluid geopolitical situation, particularly the Russia-Ukraine conflict and was prepared to meet on an ad-hoc basis if need be.

From the market perspective, the decision was not a surprise as secondary market yields due to deteriorating inflation outlook had already incorporated an increase in the policy rate of such quantum, where the cutoff yield on the 6M and 12M crossed 13%  in yesterday’s auction. Moreover, 6M-KIBOR which was already standing at over 12.5% before the announcement was indicating the market’s expectation of a major move to taper down widening real rates.

The higher interest rate environment may already be greatly priced in by the equity market, especially as the central bank seemed to indicate that it is done with monetary tightening, for now, Raza Jafri, Head of equities at Intermarket Securities said.

In addition to raising the policy rate, the SBP has made two additional monetary adjustments to reduce pressures on inflation and the current account. These measures include; an increase in the interest rate on the export refinance scheme (EFS) and widening the set of import items subject to cash margin requirements. These items are mostly finished goods including luxury items and exclude raw materials. These 2 action points will further enable the SBP to limit the deficit in the current account whilst providing much-needed traction to external stability.

SBP now expects inflation to average higher than 11% for FY22 as global commodities prices are expected to remain elevated for longer despite the US Federal Reserve hinting to increase interest rates quicker than anticipated. On the other hand, moderation in the Current Account Deficit will likely stand its ground to enable SBP in remaining steadfast to its CAD forecast of 4% of GDP.

On the sectoral front, the move is positive for the cash-rich companies. On the flip side, cyclical sectors i.e., Cement and Steel sectors are likely to witness a negative impact due to hefty borrowings for expansion and demand compression due to interest rate tightening. Similarly, demand in the auto sector will also be adversely affected by higher financing rates.

Copyright Mettis Link News

Posted on: 2022-04-10T14:47:59+05:00

31961