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MPS Preview: Waiting Game

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January 24, 2022 (MLN): In the upcoming monetary policy statement, Central Bank may keep the policy rate unchanged at 9.75% and wait for recent budgetary measures to find a foothold and achieve its desired goal of curbing demand-side pressures.

While the risk to envisaged economic growth from the recent COVID-wave is also expected to defer the SBP decision to increase the policy rate in the upcoming MPC.

The monetary policy committee of SBP will meet on Monday, January 24, 2022, to announce the monetary policy for the next two months (Next policy: Mar 08, 2022).

To recall, the SBP already increased the policy rate by 2.75% in the last four months.

In its last monetary policy statement, SBP had clearly stated that monetary setting will remain unchanged in the January 2022 announcement as the end goal of mildly positive real interest rates on a forward-looking basis was close to being achieved. SBP governor in an interview with Bloomberg also stated “We are going to take a pause to first gauge the effects of policy normalization settings undertaken in the last few months.”

Moreover, market consensus also seems to be pointing towards the status-quo as only 2 out of 7 research houses forecasted that the SBP will increase the policy rate by 50-75bps in the upcoming MPC meeting, while others believe there will be no change in the policy rate.

Brokerage House Expectations
Topline Securities No change
Arif Habib Limited No change
AKD Securities No change
Taurus Securities  No change
Sherman Securities   Up by 50bps-75bps 
Spectrum Securities No change
Pearl Securities  Up by 50bps

The other factors that support the case for no change in the policy rate include IMF pre-conditions for the next disbursement which have been met.

Second, cut-off yields on government securities are also pointing towards the status-quo as they have tumbled since the last monetary policy announcement. Secondary market yield on 3M T-Bills declined by 47bps. Similarly, the cut-off yield on 3M T-Bills in the most recent auction was recorded at 10.45%, down by 34bps since the auction before the last MPC announcement.

On the inflation front, the continuous rise in energy-related commodity prices including oil, RLNG, and coal fueling inflation at the local front. Inflation stood at 12.3%YoY in the month of Dec’21 compared to 11.53% and 7.98% YoY in Nov’21 and Dec’20, respectively. In the month of January 2022, it is likely to remain elevated due to the low base effect and hike in fuel prices.

Meanwhile, the higher commodity prices in the international market are putting pressure on the country’s current account. During 1HFY22, the current account deficit ballooned to $9.09 billion due to extraordinary import bills fueled by higher international commodity prices. If global commodity prices do not come off, the deficit in the current account will remain elevated for the next few months, leading to questions on support to PKR against the USD this year.

Despite the likelihood of status quo in the January MPS, analysts expect that the policy rate has not peaked yet and the modest tightening beyond the January MPS is likely due to rising current account deficit and inflation reading which may necessitate further interest rate increases.

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Posted on: 2022-01-24T01:01:24+05:00