July 31, 2023 (MLN): The State Bank of Pakistan (SBP) will likely maintain the policy rate at 22% in today’s Monetary Policy Committee (MPC) meeting, as the headline inflation has started to ease on the back of the high base effect.
This strategic move is expected to provide some stability to borrowers and businesses who were facing volatile and high-interest rates and borrowing costs.
Moreover, the stable cut-off yields in the recent T-Bills auction also indicate that the market expects the policy rate to remain the same, the cutoff yields have increased within the range of 90bps -100bps since the June 21, 2023 auction.
Post June 2023 MPS, the cutoff yields have merely increased for 3M tenor by 20bps.
Meanwhile, according to the latest poll conducted by Mettis Link News, market participants are largely expecting a 100bps rate hike. However, if we take clues from the latest staff report from the IMF, which highlighted that the effects of this tightening are yet to be fully felt. Thus, it can be said that MPC will maintain interest rates at 22%.
“The core inflation is expected to gradually decline in FY24, due to necessary policy tightening, which typically operates with a lag” the IMF staff report noted.
It is important to note that Pakistan is currently experiencing one of the most intense and aggressive rate hike cycles in over three decades, in just 21 months, the SBP has hiked rates by a whopping 1500 basis points, making it a period of monetary tightening unlike any other in recent history.
At this point, none of the participants expect a dovish stance.
To recall, the SBP convened its last MPC meeting on June 26 where it announced a hike of 100bps in the policy rate which was maintained at 21% in the meeting held just a couple of weeks back.
The emergency meeting convened before the Eid holidays was viewed as a means to comply with the preconditions of IMF in the ‘decider week’, consequently leading to the signing of SBA between the country and the fund.
Moreover, inflation has started to decelerate since June 2023 when CPI was recorded at 29.4% compared to May 2023 CPI recorded at 38%.
Rupee stabilizes as foreign inflows boost reserves
The Pakistani rupee has also started to show stability on the back of significant foreign inflows.
The country's total reserves stand at $13.53 billion during the week ended on July 21, 2023, which has received a substantial boost this month.
This boost in reserves was attributed to substantial deposits received during the week, which included a $1.2bn immediate disbursement received from the International Monetary Fund (IMF), $2bn deposit from Saudi Arabia, and an additional $1bn deposit from United Arab Emirates (UAE).
China Exim Bank also approved extending Pakistan’s $2.4bn loan for a time span of two years on July 27, on top of a $600 million loan rollover on July 18 which further helped strengthen the country’s Foreign Exchange Reserves.
Additionally, Federal Minister for Finance and Revenue Senator Ishaq Dar on July 30 pledged to raise the country’s Foreign Exchange (FX) reserves to $15bn within the next 7 weeks.
Copyright Mettis Link News
Posted on: 2023-07-31T12:17:46+05:00
