SBP says "No Change" and tells hawks to "Calm Down, Calm Down"

September 14, 2023 (MLN): Market participants are baffled. Why didn't SBP increase interest rates again? Especially if the recent T Bill auctions clearly indicate that the market wants more and GoP is willing to borrow more.

Instead of taking a sigh of relief, investors are worried. Did they think interest rates will control inflation?

In today's monetary policy, SBP has gone against nearly the market consensus of a 150-200 bps hike. Surprisingly, the team's body language was more confident in the post-MPC's analyst briefings.

It seems SBP is undoubtedly taken by surprise by current action against USD hoarders and speculators. Tough ones can do what interest rate hikes couldn't. 

Interestingly, the SBP is also upbeat about the inflation trajectory, updating its model's assumptions of increased oil prices. This does increase the probability of "peak interest rates" for now if Rupee stabilizes further.

Further gas and electricity hikes would be less impactful than previously forecasted. It seems we have peaked out. 

So what now? The yield curve adjustment may be needed if the secondary market aims to secure long-term juicy returns. GoP should also be patient with reductions in interest rates before offering free lunch with high-yielding fixed PIBs.

A positive take away from the analyst briefing is that it contained a $160M current account deficit in August and that quantitative targets under IMF are also met. 

Investors, economists, analysts, commentators and policymakers should focus on structural reforms and signs of stability and growth. SBP has hawked enough and should lay the path of interest rate cuts after a quarter or two.

Job creation, export growth, industrialization and fiscal stability can not happen at a 22% policy rate. One uncertainty down, millions to go.

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