MPS Preview: Policy Rate likely to go up by 100bps

July 15, 2019 (MLN): The State Bank of Pakistan is set to announce the Monetary Policy Rate for the next two months, on Tuesday i.e. July, 16 2019. Keeping in view the new Monetary Policy framework, inflationary pressures and PKR devaluation, the Central Bank is expected to raise the Policy Rate by 100 bps to 13.25%.

As pointed out earlier, the Central bank has set the date for Monetary Policy announcement ahead of MTB and PIB auction to ignite hope and clarity in investors and prompt participation in these auctions, therefore enabling the government to achieve its desired target of Rs. 700 billion against a maturing amount of Rs. 981.821 billion.

Speaking of the focal reasons behind the aforementioned estimate, the Consumer Price Index figure is expected to reach around 10-10.25% by September, from 8.88% in June-2019. According to a research report by Al Habib Capital Markets, this leap in inflation figure is expected on the back of fiscal pressures emanating from Budget 2020, upward adjustment in electricity/gas tariffs, recent hike in transport fares of buses and negative implications of anticipated PKR devaluation.  

In view of the aforesaid expectations, the following brokerage houses have put forth their predictions of the upcoming Policy Rate, with the majority opting for 100bps increase in interest rates.

It would be prudent to note that a possible hike in policy rate will clearly result in lower lending by banks, which will evasively hinder the growth of an already flagging economy. In addition to this, investors would be more prone towards fixed income instruments rather than the equity instruments, causing further damage to equity markets.  

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