MPS Preview: SBP likely to change its hawkish stance by maintaining status quo

September 16, 2019 (MLN): The State Bank of Pakistan (SBP) is scheduled to announce the Monetary Policy Rate for the next two months, on September 16, 2019. This time, the forthcoming monetary policy announcement is expected to take a different turn, as most of the analysts expect that the stage is set for a policy rate cut or unchanged rate at 13.25% after experiencing lower inflation figures post rebasing.

In the last monetary policy announcement, MPC increased the policy rate by 100bps keeping in view of rising inflation rate (SBP estimate of 11-12% in FY20) due to currency depreciation, increase in energy and food prices.

The rebasing from 2007-08 to 2015-16 has led to a significant fall in rates of inflation and is likely to keep inflation figures on lower side compared to previously estimated figures for FY20.  Furthermore, inverted yield curve, as witnessed in recent PIB and T-bills auctions, has also strengthened the view that the interest rate cycle has reached its peak and is expected to decline going forward.

Besides the lower inflation figures, this anticipation is also formed on the back of improving macroeconomic picture such as declining current account deficit, stable forex reserves and strengthening PKR, as Rupee has gained 1.98% of its value since last MPS, July 2019, which may help in easing inflationary pressures in the coming months.

On the other hand, the gloomy position on the fiscal front is however, a cause of discomfort and suggests that the rate cut is not on cards as FBR has failed to meet the tax collection target by PKR 64.2 billion against PKR 643.6 billion. Moreover, dropped LSM growth by 3.64% YoY in FY19 indicates that it would be difficult for the authority to meet the tax collection target for 1QFY20.

Meanwhile, on the global front, the Central Banks seem to be in a rate cutting fever. European Central Bank (ECB) announced rate cuts, moreover, Turkey and Denmark also slashed rates and Fed is widely expected to deliver another cut in the US interest rates next week, suggesting that more rate cuts are on the table.

Moreover, in a survey of the expectations regarding the upcoming policy rate announce by SBP, only 1 out of 21 research houses forecasted that the SBP will cut policy rate by 25bps, while others believe that the SBP will change its hawkish stance this time by maintaining status quo on policy rate. Keeping in view the above-mentioned scenario, further hike in policy rates by SBP would be difficult to defend.

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