SBP Monetary Policy Committee increases rates, raises forecast for economic growth

State Bank officials today surprised the markets by raising rates and raised their forecast for economic growth in 2018 sticking with the projections of more hikes during the incumbent year.

“The given change highlights that the committee expects the inflation to remain strong and pace upwards during the year,” Governor State Bank told reporters on Friday at SBP Headquarters in Karachi while announcing the decision. “Therefore, the Monetary Policy Committee has decided to raise the rate by 25 basis points to 6.00%.”

In a significant shift from the widely held market consensus, the State Bank officials are bullish on inflation during the coming few months. “Rising oil prices in the future are expected to have a significant impact on the inflation in coming months,” mentioned Mr. Bajwa.

However, inflation has remained well within the targets set by SBP – 6 percent – during the current fiscal year. Governor SBP was also highly optimistic that, “the yearly inflation, as per SBP estimates, will remain well within the targets.”

Sindh Bank, Treasury Head, Ms. Rukhsana Narejo said the earlier assumption of SBP maintaining the “status quo” was due to the upcoming elections in 2018. However, “SBP rising rates is a very mature decision, this will decrease the pressure on External Account.”

The implications of the raise are to be seen most in the money markets, where the Government has been forced to raise rates from 3 – month instruments in their last auction. “The rate hike will definitely help ease up the pressures for government, investor interest in six – month instruments is to witness a jump following today’s announcement.” The raise also brings an uncertainty, as investors mull over the upcoming rate hike, the participation in 12 – month is likely to remain unchanged. “Investors will reluctant to invest long term, as market expects another rate hike in June by another 25 basis points,” remarked Ms. Narejo.

Whereas, Mr. Shoaib from Bright Securities was of the opinion that, “This rate hike is neither here nor there, the only purpose it serves is of increasing the uncertainty in the markets.” He mentioned the resulting confusion from this as one of the key reasons investors would be reluctant to participate in the 6 month bills. “The government’s raise does not serve the required purpose in anyway, the upcoming quarters’ needs exceed whatever this rate hike can fetch,” he further mentioned.

The last time SBP raised rates was in November, 2013 when it raised rates from 9.5% to 10.00%. This is the first time Central Bank has raised the interest since Policy Rate was introduced in May, 2015.

Key Projections

  • Inflation remained well within the targets during the half year; SBP expects inflation to rise during the year as global oil prices increase
  • Exports have risen; but Import increases have strained the fiscal resources
  • GDP Growth projected at 5.5%
Posted on: 2018-01-26T18:18:00+05:00