MPS Preview: Monetary easing just around the corner?

March 16, 2020 (MLN): The Monetary Policy Committee (MPC) of the Central Bank is scheduled to meet tomorrow i.e. March 17, 2020, to announce the Monetary Policy Rate for the next two months.

In this catastrophic time, where Pakistan equity just as the other equity markets across the globe felt the brunt of COVID-19 and crashing oil price, the rate cut seems possible as most of the countries are easing monetary policy to support their economies.

In the month of March alone, Pakistan witnessed a significant outflow from foreigners with net selling amounting to $31.4 million, out of which, $12.9 million was attributed to Equity and $18.4 was attributed to T-bills.

In addition to this uproar in the market, several other events and government policies are also hinting that the State Bank of Pakistan (SBP) aims to move towards economic growth after successfully executing IMF led stabilization policies.

First, fall in oil prices resulting from COVID-19 outbreak and recent disagreement between Saudi Arabia (KSA) and Russia over supply cuts came as no less than the blessing in disguise for Pakistan as they likely to reduce CAD which would be assuaged by a corresponding fall in exports and remittances.

Second, the stabilization in exchange rate with the foreign reserves sufficient to cover country’s 3 months import bills and declining current account deficit (CAD) has further opened a way for interest cut in Pakistan.

Third, the deceleration in February’s inflation numbers to 12.4% YoY which is expected to decelerate further in the month of March on the back of SPI data and also lower oil prices have the potential to reduce inflation level. Moreover, falling POL product prices along with power tariff and the delay in the proposed increase in gas and electricity tariff are likely to expedite the monetary easing.

Last but not the least, the recent decline in the cut-off yields for T-bills and PIBs also warrants some easing action.

However, despite the above-mentioned factors which give an indication that the rate cuts might on card, Monetary Policy Committee (MPC) of SBP would remain cautious before taking monetary easing stance as it will further aggravate the hot money outflows which have been gathered stride recently. Furthermore, the recent currency devaluation, Ramazan effect and if the proposed increase in gas and electricity tariff is materialized, would put an upward bias in inflation and thereby, delaying in monetary easing.

To recall, in the last monetary policy announcement on January 28, 2020, MPC kept the Policy Rate unchanged at 13.25% on account of the unchanged inflation outlook.

This time, following a global trend for rate cut to counter growth over Novel Coronavirus, the market participant believed that SBP is likely to follow the suit as in a survey on the possible decision to be taken by the SBP’s Monetary Policy Committee, 24 out of 25 brokerage houses have projected a significant rate cut in upcoming monetary policy.

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