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SBP Monetary Policy Preview: Market expects status-quo

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The State Bank of Pakistan is all set to announce Monetary Policy Statement today via a press release. SBP is expected to keep the rate unchanged and maintain status quo as Inflation and other macro variables continue to be within the expected range.

Inflation

Inflation has picked up in the recent months after reaching its lowest in July – 2017 clocking in at 2.9% YoY. Inflation witnessed a gradual incline in August reaching 3.4%, 3.9% in September, and 3.8% for the month of October. The incline in prices has been contributed by the impact of rising Food prices and Oil prices simultaneously. Average CPI for the first four months of FY ’18 has clocked in at 3.5%, and is expected to clock in at 3.61% for July – November, according to analyst estimates.

The median forecast of Inflation for the month on November, 2017 by industry experts is at 4.03%, with key contribution coming from Transport and Food sector.

Food Prices saw significant surge after a shortage of essentials such as Tomatoes and Onions rose the CPI for Food Basket in the overall CPI components. Prices for tomatoes and onions doubled during the months of August and September. In addition to that, due to a bullish trend in the prices of oil in international markets, the impact of Energy Prices has translated into the local prices. With a rise in prices of Super, Petrol, and High Speed Diesel (HSD): the energy basket has resulted in a rising CPI during Aug – Oct period.  

Inflation

Month

CPI

Food

April, 2017

4.8%

4.4%

May, 2017

5.0%

4.9%

June, 2017

3.9%

2.4%

July, 2017

2.9%

-0.1%

August, 2017

3.4%

1.3%

September, 2017

3.9%

2.4%

October, 2017

3.8%

2.2%

November, 2017*

4.06%

2.3%

*The values are based on various research house estimates and their median

The Deficit

State Bank’s Monetary Policy Committee in its September 29, 2017 statement warned of increasing external sector pressures on the economy. Since then, the deficit has widened to 5.013 billion due to non-effective export policies. Government has taken various initiatives to curb the rising deficit from issuing Euro and Sukuk bonds to increasing levies on import of certain items.

Commenting on the foreign issue, JS Capitals’ Mr. Atif Zafar said that, “Pakistan will be able to attract the required funds from the issue”. Pakistan’s economy has seen reforms over the course of last few years that would also help with the yields for the issue. Pakistan’s last foreign issue fetched funds at a rate of 8%.

T-Bills and PIBs

SBP’s Treasury bill auctions have remained the favorites but only in the 3-months and 6-month bills tenures whereas investors have been reluctant to invest in 12-month bills during the past few auctions raising prospects of an imminent interest rate hike.

The same has been the case with the Pakistan Investment Bonds where investors are reluctant to invest in long-term instruments. The said reluctance has been hinting at an expected rise in interest rates as investors are unwilling to commit long-term.

A closer look at the PIB auction history during the last two years shows a decline in investments for bonds spanning a longer term. SBP since January 28th 2015 has accepted no bids for its 20 year PIB Targets.

On the investor front, of the 31 auctions held since Jan 2015, SBP has received bids only 3 times for its 20 year targets which were subsequently rejected as well.

Conclusively, after seeking opinions from various analysts and experts, it is expected that the Central Bank will maintain status quo in the Monetary Policy Statement today. However, the case for rising interest rate strengthens as inflation picks up slightly yet surely in lieu of the rising oil prices.

Posted on: 2017-11-24T12:04:00+05:00