March 09, 2022 (MLN): Wiping off market concerns pertaining to the change in MPC’s forward guidance in the wake of soaring commodity prices and the Russia-Ukraine tussle, the State Bank of Pakistan (SBP) maintained the status quo on the back of the improved inflation outlook mainly due to the relief package announced by the Prime Minister Imran Khan.
However, keeping in view the ongoing conflict between Russia and Ukraine which has elevated the upward rally of commodity prices and created supply threats, the central bank is vigilant as MPC is likely to meet earlier than the next scheduled MPC meeting in late April to make any needed timely and calibrated action to safeguard external and price stability.
It seems that MPC will consider a rate hike in the expected “early meeting”.
Although, the prospects of increasing interest rate hikes were relatively high to do the trick in response to the historical surge in international commodity prices the SBP preferred to stick around forward- guidance.
Not to forget, after taking a long pause during the spell of Covid-19, the monetary tightening has started from September 2021 and increased the policy rates by 275bps which has been yielding the results to moderate growth and cool down the overheated economy.
On the other hand, the analyst fraternity is of the view that MPC should have increased the policy rate in its latest meeting.
Arvind Anand, Head of Research at Fortune Securities told Mettis Global, “With the recent relief package announced by the government in terms of subsidized fuel prices and electricity tariffs, the fiscal side remains fluid, hence monetary tightening would have been a better move.”
Russia-Ukraine situation also poses a significant risk to MPC’s decision taken yesterday which is being closely monitored by the Central Bank.
“SBP remains prompt and will most likely take a corrective action by increasing the policy rate in the near term if the Russia-Ukraine situation worsens,” he added.
Even though a change in monetary setting was required presently, notwithstanding the encouraging Relief Package impact on inflation outlook and recent demand moderation, SBP will wait for the fluid situation of Ukraine conflict to unfold further, to be able to change a monetary setting in an emergent meeting before the next scheduled announcement on April 19, 2022, Wajid Rizvi, Head of Strategy and Economy at JS Global Capital Ltd told Mettis Global.
While explaining, the inflation outlook which was used to keep the policy rate intact, the MPC statement noted, “headline inflation moderated in February to 12.2 percent (y/y). Inflation in February would have been noticeably lower were it not for abnormal increases in a few perishable items. Accordingly, core inflation also fell in urban areas and inflation expectations have remained stable, suggesting that second-round effects from higher commodity prices remain contained.”
Looking forward, the MPC is expected that inflation to average between 9-11 percent in FY22 before declining toward the medium-term target range of 5-7 percent in FY23 as global commodity prices normalize.
Meanwhile, the stance of MPC pertaining to growth in FY22 remained firmed at the previously forecast range of 4-5 percent.
To justify its stance further, the MPC also noted that despite the rise in global prices, the February trade deficit witnessed a further 10 percent contraction (m/m) on top of the 29 percent decline recorded in January, confirming the slowdown in domestic demand.
While the current account deficit rose in January, this largely reflected lumpy imports of oil, vaccines and other items financed through loans and supplier credit.
Excluding these imports, the deficit would have been about $1 billion lower, suggesting that the underlying trend in the current account balance is also moderating, the statement added.
Moreover, the depreciated exchange rate and higher imports reflected in significant growth in FBR’s tax collection as MPC noted, “FBR tax collections grew strongly by 30 percent (y/y) during Jul-Feb FY22, in part due to a depreciated exchange rate and higher imports than last year as well as strengthened tax collection efforts.”
This offsets declines in non-tax revenues due to lower petroleum development levy revenues and increased spending, including on subsidies, grants and provincial PSDP.
With regards to the impact of the MPC decision on the Pakistan Stock Exchange (PSX), Ahsan Mehanti, Director Arif Habib Limited stated, “Capital markets outperformed regional peers on status quo policy as the bourse surged higher in early hours of today’s session.
Though the inflation suggested policy revision however SBP remained cautious and indicated the possibility for early meetings if needed, he noted.
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