April 22, 2024 (MLN): The State Bank of Pakistan (SBP) is expected to keep the policy rate unchanged at a record 22% for the seventh consecutive policy meeting on April 29, waiting longer than previously anticipated to cut rates.

To gauge market sentiment, Mettis Global News conducted a survey regarding the upcoming central bank’s monetary policy decision.

The survey results imply a status quo, with the majority of participants (51.9%) expecting the SBP to maintain the policy rate at 22%.

This is in contrast with the previous MPC survey conducted in March, where majority (62.5%) of participants anticipated a rate cut in April meeting.

This means that the survey indicates a shift in market sentiment, with a greater inclination towards anticipating a more cautious, wait-and-see approach from the central bank.

Meanwhile, 45.3% of participants anticipate a rate cut on Monday. Interestingly, among those expecting a cut, 50% foresee a reduction of 300 basis points (bps) or higher and 18.8% expect a cut of 100 bps.

To recall, in the last scheduled meeting of March 2024, SBP maintained the policy rate unchanged at 22% citing that inflation outlook is susceptible to risks amidst elevated inflation expectations.

Money Market Yields

Since the last monetary policy meeting held on March 18, 2024, the secondary market has seen an increase in yields across almost all tenors.

The 3-month yield has risen by 55bps, the 6-month by 33bps, and the 12-month by 43bps, respectively. The 3-year and 5-year yields have seen a minor increase of 2 and 5 bps.

Meanwhile, the 10-year yield has fallen slightly by 1 bps since March 19, 2024.

In the primary market, the 3-month and 6-month Market Treasury bills (MTBs) yields have remained unchanged, while the 6-month yield has risen by 101bps compared to the previous auction.

Inflation forecast

Continuing the disinflation trend, consumer prices will experience an even sharper downward trend from June onwards due to a high base.

If consumer prices rise an average 0.5% a month going forward, annual inflation will drop to about 18.1% by the end of June and 8.4% by December.

With a 1% monthly increase, annual inflation will fall to about 19.8% by June and 13.3% by December.

Meanwhile, with an average monthly increase of 1.58%, which is the last 12-month average, annual inflation will stand at 21.9% by June and 19.4% by December.

The following chart maps out the yearly inflation trajectory based on monthly inflation rates of 0.5%, 1%, and the last 12-month average of 1.58%

Inflation easing, but challenges persist

To note, the International Monetary Fund (IMF) has forecasted that Pakistan’s inflation will remain elevated at around 24.8% in FY24 but is expected to ease significantly to 12.7% in FY25.

Separately, the global lender has stressed that the key for most countries is to ensure they are durably back to their inflation targets and not to ‘cut prematurely’.

Monetary policy has been tightening over the past two or three years in Pakistan to control inflation, which is projected to decrease, but ‘more work’ needs to be done on the demand and supply sides, said Jason Wu of the IMF while addressing a press briefing last week.

Wu further added that both the supply and demand sides contribute to inflation. So in that sense, policy is needed on both sides.

Jason Wu noted that Pakistan is in a program, and faces macro challenges, including financial sector and central bank policies, as well as broader macro and fiscal issues.

Meanwhile, the recent surge in global oil prices can further exacerbate inflationary pressures.

Higher commodity prices and tighter global financial conditions, due to the intensification of geopolitical conflicts, put pressure on the exchange rate and external stability.

Copyright Mettis Link News

Posted on: 2024-04-22T13:35:04+05:00