December 13, 2021 (MLN): The monetary policy meeting is scheduled for Tuesday, wherein SBP is expected to deliver another aggressive interest rate hike of 100bps or above.
Since the last MPC meeting, SBP has been under pressure to deliver another hike in the light of spiraling inflation, continued external pressure with Rupee depreciation showing no sign of dimming after hitting an all-time low of Rs177.89 interbank market close on December 13, 2021.
The recently released data paint a gloomy picture, suggesting an aggressive tightening stance to follow. First, preliminary merchandise trade data for November showed that imports hit a record high of $8 billion, up by 83% YoY which is a clear sign of potentially strong domestic demand and the resulting external pressure. The mounting import bill elucidates why the US dollar against the Pakistan rupee did not react positively to the 150bps interest rate hike in November, nor did it react positively to the resumption of the IMF plan and the official signing of the Saudi deposits contract.
Second, spiraling inflation is another point of pressure. With each passing month inflation worries echoing more clearly than before. In Nov’21 alone, headline inflation reached 11.53% YoY which was the highest monthly YoY increase since Feb’20 and core inflation accelerated for the second consecutive month. Food and energy-related commodity prices, such as oil, RLNG, and coal, as well as Rupee devaluation, are the main causes of overshooting inflation. The recent rise in inflation points towards higher inflation in FY22, as the growing consumer demand following the end of the epidemic suggests that inflationary pressures will persist for few months.
Finally, secondary market yields which have been directing the movement in the policy rate more or less over the last two MPC meetings, have shot up significantly in the past few days. Since the commencement of the rate hike cycle i.e., from September 20, 2021, the cut-off yield increased by 306bps for 3M T-bills to 10.66% as of December 14, 2021. While cut-off yield for 6-month and 12-month T-bill was recorded at 11.25% and 11.49%, up by 326bps and 276bps respectively, whereas the policy rate has risen 175bps only. The rising gap between the policy rate and yields leaves ample room for another hike of 100bps or above.
Market expects a hike in the range of 100-150bps
This time, again, market participants believe that SBP is likely to increase policy rate at a higher magnitude of 100 bps or above. A survey of financial market participants conducted by Mettis Global Pvt Limited revealed that about 77% of the participants expect an interest rate hike of 100bps or above in the upcoming monetary policy meeting as compared to 56% in the Nov-21 meeting survey.
Moreover, around 55% expects more than 150bps increase in the policy rate by the end of FY22 compared to 89% in the last survey, while 31% of the participants foresee it to increase by 150 bps during FY22. Around 11% of the participants are expecting an increase of 100bps and only 3% of the participants are expecting a rise of 50bps during the period.
With regards to inflation, survey results showed that about 54% of the participants believe headline inflation during FY22 will average between 10%-11%, while 27% expects average inflation will stand within the range of 11% -12%. About 15% of the market participants expect inflation to average between 9-10% during FY22, while only 4% believe it to average above 12%.
On the exchange rate front, the Rupee is continuously showing a declining trend against the USD. Since last MPS, Pak Rupee has lost Rs2.5 against USD due to deteriorating forex reserves and a massive increase in the current account deficit which reached $5.2 billion in 4MFY22.
However, according to REER, the performance of the Pakistani currency should improve as REER is below 100, the Pak Rupee depreciated by 13% during FY22 to date. The SBP is expected to tackle PKR depreciation through an increase in the policy rate, Abdul Azeem analyst at Spectrum Securities said.
As per the survey results, around 66% of the market participants expect the exchange rate to remain between 180-185 by FY22, as compared to the 22% in the last survey. While 24% of them expect it in between 175-180. Some 2% and 9% of the participants expect the currency to trade in the range of 170-175 and above 185 respectively.
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