MPS Preview: Flareup of COVID19 vetoing rate hike

November 22, 2020 (MLN): State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) is scheduled to convene on Monday, November 23, 2020, wherein the market participants expect the MPC to announce “no change” in the policy rate for the next two months.

After reducing the policy rate by 625bps from March to June due to COVID induced slowdown, the SBP has maintained status quo and kept the interest rate unchanged at 7% and real interest at below zero on forward looking basis for the last nearly 5 months to stimulate aggregate demand and employment in the aftermath of COVID-induced lockdown.

This time around, despite signs of recovery, the rise in covid-19 cases owing to the second wave and the fear of tightening of lockdowns again, continue to cast doubt on sustainable recovery in the coming months. Hence, an extraordinary need for liquidity and low financing cost is required again to support the economy which signifies that status quo is imperative.

Simultaneously, the headline inflation which remained largely in line with SBP range of 7-9%, is expected to somewhat ease off or remain stable in the coming month on the back of expected reversal in volatile food prices (Staple good mainly) on improving supply, and relatively lower international oil prices which has been a breather to the upside risk to energy component of inflation, says a report by Arif Habib Limited.  However, a surge in food prices due to supply constraints, spike in energy tariff and the additional revenue measure amid IMF program resumption remain the major threat for inflation. To note, the headline inflation for the 4MFY21 has declined by 146bps YoY to average inflation of 8.86% compared to 4MFY20 average CPI numbers of 10.32%.

Similarly, the current account position is quite relaxing as the country managed to post a current account surplus of USD 380 million in Oct’20, leading to a surplus of USD 1.16 billion in 4MFY21 compared to the deficit of USD 1.42 billion in 4MFY20 on the back of higher exports along with booming remittances. In addition to this, stable PKR against USD (as Rupee appreciated 4.4% from FY21 to date), and a 2.5-year high SBP reserves indicate no external pressure due to negative real interest rate, Taurus Securities in its report underscored.

With regards to fixed income market, Arif Habib stated that it seems that fixed income market is also signaling towards unchanged stance as there was no major change in the treasury bills yields of 3M, 6M and 12M in the recent auction (on November 18th, 2020) which were at 7.15%, 7.20% and 7.25%.

Thus, based on the above factors, SBP will likely keep interest rate at prevailing level in order to support the economy and improve business sentiments during the pandemic.

Copyright Mettis Link News