Mettis Global News
Mettis Global News
Mettis Global News
Mettis Global News

Trending :

SBP likely to raise interest rates by 25bps in coming monetary policy: Rukhsana Narejo, Sindh Bank

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp

State Bank of Pakistan will announce Monetary Policy Statement on Friday, 30th of March 2018. The Central Bank has followed a more proactive approach towards policy making. In the January announcement, SBP noted that “Monetary Policy Committee is of the view that in order to preempt overheating of the economy and breaching its target rate, this is the right time to make a policy decision that would balance growth and stability in the medium to long term.

“In minutes of meeting of last Monetary Policy Meeting, Inflation had been the headline cause for a pre-emptive rate hike. The minutes mention that, “[…] factors augmented the core inflation, which  is indicating higher inflation going forward – a fact also corroborated in the latest reading of IBA – SBP’s Consumer Confidence Survey.” Monetary Policy Committee in previous MPS had anticipated that inflation for fiscal year 2018 was likely to remain within an estimated range of 4.5 – 5.5 percent, however, the committee concluded that under existing trends inflation could inch “towards the annual target of 6 percent”.

Inflation’s trajectory since the last announcement has gone downward from 4.6 percent in December, 2017 to 4.4 percent in January, 2018 and 3.8 percent in February. Furthermore, the market consensus on March, 2018 inflation is 3.10 percent, thus bringing down inflation for the nine months of current fiscal year to 3.76 percent. “Inflation for March 2018 is expected to clock in at 3.21 percent year on year … inflationary pressure driven by mounting food prices is expected to build-up in upcoming months on account of Ramzan”, according to Ms. Naima from Shajar Capital.

The lagged translation of December Rupee depreciation in the economy vis-à-vis inflation will be felt most during the month of Ramzan in May. The inflationary pressures are also expected to build up owing mainly due to the rising global oil prices, seasonal impact during Ramzan, and impact of March rupee depreciation in the market prompted by food and transport subsets of Inflation Index.

We expect State Bank to raise the rates by 25 basis points tomorrow, and another 25 basis points in the next Monetary policy announcement – Rukhsana Narejo, Sindh Bank 

Regarding the impact of inflation on the MPS decision, Mr. Haris Imtiaz at AKD securities points out that, “with inflation below the SBP’s target of 6 percent, real interest rates stand at comfortable levels; 220 basis points in fiscal year 2018 …. we expect status quo in the upcoming MPC meeting on March 30, 2018” On the contrary, Spectrum Securities highlights the rising oil prices coupled with Rupee devaluation as the main factors prompting the committee to make another pre-emptive raise in tomorrow’s announcement. “We expect that SBP would increase the interest rate by 25bps-50bps to maintain the interest parity”, forecasts Spectrum securities.

Ms. Rukhsana Narejo, Head of Money Market, Treasury Department at Sindh Bank Limited is of the opinion that, “We expect State Bank to raise the rates by 25 basis points tomorrow, and another 25 basis points in the next Monetary policy announcement.” The state of the economy at the moment is such that the State Bank must be pre-emptive in policy making, the International Monetary Fund (IMF) also called for an effective policy management from Central Bank. “We need to look beyond inflation to the rising core inflation numbers”, she said.

Core Inflation (Trimmed) has risen steadily over the last few months from 4.0 percent to 4.3 percent in February, 2018 peaking at 4.7 percent in December. Furthermore she also highlighted the imbalances in other macro-economic indicators mainly forex reserves, widening fiscal deficit which continue to pose a strong case of higher rates.

Regarding the Rupee depreciation, she said that “the IMF had been urging Government to bring the rates to that of Real Effective Exchange Rate for quite some time now, with the recent depreciation in December and March, the 115/155.50 is a reasonable rate for rupee against the dollar. We expect the currency to remain stable at this level for coming months.”

Arsalan Hanif at Arif Habib Limited opines that, “This time round, we expect another rate hike of 25bps in the monetary policy, in order to support waning local currency as PKR depreciated by more than 4% against green back during the month alongside the need to maintain interest rate differential.”

Participation from investors in Money market also hints at a rate hike, as it reached new lows during last two Monthly Treasury Bills (MTB) auctions. State Bank of Pakistan released MTB auction results yesterday accepting bids worth Rupees 2,871.635 million in three month instruments against bid amount of Rs. 136,180.848 million at a weighted average yield of 6.2591 percent. State Bank of Pakistan received bids worth Rs 138,263 million versus the SBP target of 650 billion against maturities worth Rs. 586 billion. Lower bids from financial institutions are likely a result of expectation of an increase in interest rates.

Reviewing the situation in inflationary paradigms influenced mainly by rupee depreciation, rising global oil prices, increasing transport prices and effect of food prices also keeping in view the upcoming seasonal effect of Ramzan/Eid the SBP is likely to raise the rates by 25 basis points in tomorrow’s announcement. Furthermore, the money market dynamics and participation makeup visible in the last two MTB auctions have also raised hoped for a raise in rates. The street, however, does not have a consensus as interpretations over different indicators vary from analyst to analyst.

Posted on: 2018-03-29T14:31:00+05:00