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MPS Preview: Turnaround in stance seems to be unlikely for now

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January 21, 2021 (MLN): State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) is scheduled to convene on Friday, January 22, 2020, wherein the market participants expect the MPC to announce “no change” in the policy rate for the third consecutive time.

Despite the upturn in aggregate demand as indicated by high-frequency demand indicators, it will still be too soon for the SBP to increase interest rates, as the economy is currently hit by the ‘second wave’ of the pandemic and the perpetuation of a strong recovery in aggregate demand is still a challenge. Thus, the status quo in the policy rate is the plausible option for SBP, as the economy still needs an accommodative policy to accelerate recovery.

Simultaneously, the easing-off general price level (inflation) also supports the status quo in the upcoming monetary policy as it is expected to somewhat ease off or remain stable in the coming month despite rising POL prices. This will be largely on the back of expected reversal in volatile food prices (Staple goods mainly) on improving supply. The current trajectory of inflation indicates that average inflation is likely to remain within the SBP’s target of 7-9% for FY21.

Speaking to Mettis Global News, Jehanzaib Zafar, Head of Research at BIPL Securities, said that the real interest rate corridor to remain in red as Central Bank has gone out of the window as inflation is not a concern. The focus of the SBP remains on financial stability and stimulating economic growth. Previously, the governor stated that future monetary policies will continue to be driven by the pandemic situation in Pakistan. Therefore, SBP is likely to maintain the status quo at 7% in the upcoming MPC.

Moreover, it seems that the fixed income market is also gesturing towards an unchanged stance as in the recent T-bill auction conducted on January 13, 2021, stability in the yields has been noticed. The 3M and 6M tenure cut off yields remained at the Sept’20 auction level, adjusting by slight 4bps and 2bps respectively to 7.1691% and 7.2002% compared to cut off yields of 7.129% and 7.18% for 3M and 6M tenures respectively in the auction conducted in Sept’20.

Meanwhile, on the external front, the position seems stable as the surplus in the current account has reached $1.13 billion in 6MFY21, compared with a deficit of $2.03 billion in the corresponding period of the last fiscal year. This rise in surplus was largely due to increase in remittances numbers which reached an unprecedented level of $14.2 billion during the first half of FY21, up by 24.9 % YoY.

Contrary to improving current account, the trade deficit has surged by 6.44%YoY in 1HFY21 compared to 1HFY20. This drastic rise in the trade deficit was mainly due to a notable rise in import numbers on the back of the domestic economic recovery.

Looking ahead, Fahad Rauf, from Ismail Iqbal Securities, expects the current account balance might see a deficit in the second half of the current fiscal year. Workers’ remittances might drop when there is the ease of traveling restrictions around the globe, he added.

Furthermore, Mr. Faizan Haead of Research at BMA Capital seems to hold the same view as he expects a $2.5 billion deficit for FY21 due to a higher import bill amid rising crude oil prices. However, the workers’ remittance will sustain its momentum due to higher migration flows projection to remitting countries as COVID-19 vaccination is the real key to global economic recovery, he said.

On the USD-PKR front, the local currency is showing stability supported by a healthy external account of the country amid strong inflows in remittances.  Going forward, the PKR-USD pair is likely to be around Rs 165 during FY21 as the current account will turn negative on the back of higher imports due to rising oil prices driven by a global recovery, exerting depreciatory pressure on PKR, said Jehanzaib Zafar, Head of Research at BIPL Securities.

Thus, based on aforesaid facts, the SBP is likely to capitalize on room granted by subsided inflation concerns, improving external position and PKR stability in the upcoming Monetary Policy announcement.

Going forward, with the resumption of IMF negotiations wherein energy tariffs are likely to be adjusted upwards, the SBP is expected to revert to its policy of maintaining a positive real interest rate as seen in the past. In order to narrow down negative real interest rates, a hike in the policy rate can be witnessed in 1H of CY21. In addition to this, the need to maintain the external account stability further strengthened the view for monetary tightening in CY21.

Though, SBP may face-timing hurdles in reverting to policy framework with uncertainties clouding the outlook for the COVID-19 vaccination program, said AKD Securities.

To further strengthened the case, a poll of top-notch financial market participants conducted by Topline Securities also revealed that 58% of the participants expect monetary tightening to begin in 1H2021, 26% expect monetary tightening to begin in 2H2021, while 17% do not anticipate a rate hike in 2021.

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Posted on: 2021-01-21T15:42:00+05:00

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