MPS Preview: Move of the needle unlikely

January 27, 2020 (MLN): The Monetary Policy Committee (MPC) of the Central Bank is scheduled to meet tomorrow i.e. January 28, 2020, to announce the Monetary Policy Rate for the next two months.

This time, the forthcoming monetary policy announcement is likely to be no different than the previous one as the recent price trends coupled with upside risks to inflation outlook does not leave any room for monetary easing. Since the spike in food prices, revision in quarterly housing rent index, higher inflation in household equipments and higher petroleum products prices which are impacting transport and housing and utilities segments are expected to keep inflation elevated.

To recall, in the last monetary policy announcement on November 22, 2019, MPC kept the Policy Rate unchanged at 13.25% owing to unchanged inflation numbers after the announcement of the previous policy.

Even though an overall slowdown in economic activity and an improving macro numbers both on external and fiscal front warrant some easing action, nevertheless, Central Bank with its exceptional focus on Inflation is not expected to change its stance until it gets comfy with the inflation outlook.

Inflation in December 2019 stood at 12.63% and is expected to intensify up to 13.7% in January 2020 (as per the projections of various research houses). Going forward, CPI readings might remain inflated as the revision in utility tariffs have not come into effect, furthermore, if the proposed hike in gas prices are implemented in the coming month, it would trigger an unstoppable inflationary spiral.

Furthermore, in the recent auction held on January 15, 2020, yields for 6 months and 12 months bond did not change while yields for 3 months went down by only 1.57 bps. This also indicates that no change in policy rate is expected for now.

In a survey on the possible decision to be taken by the State Bank of Pakistan (SBP) Monetary Policy Committee, 15 out of 15 contributors have said no change to MPS. In addition, BIPL Securities in its report highlighted that as per the latest data, the hot money parked in the local government debt by foreign investors has crossed USD2.4bn mark. With interest rates likely to remain at current levels for the next couple of months, further accumulation of foreign ownership is expected.

“In a time when GoP is struggling to bridge it BoP requirements, an easing of 200bps – 300bps may result in the unwinding of carry trades and may flush out all the money parked (plus interest accrued) from national reserves”, the report underscored.

Similarly, Ismail Iqbal Securities expects easing to be gradual which means that leveraged companies would continue to feel pain in the near term and corporate earnings (ex. Banks and cash-rich corporates) would show a depressing picture.

Thus, in the light of aforementioned facts, SBP is not likely to go on an easing spree despite the fact that on account of higher interest rates, the growth has taken a setback and the business community, particularly the small and medium enterprises (SMEs) are facing hardships in accessing finance.

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