SBP to maintain interest rate at 10% for FY19, fiscal deficit for Pakistan revised: Fitch Solutions

January 7, 2019 (MLN): Fitch Solutions Macro Research, an arm of Fitch Ratings has stated in its latest report on the State Bank of Pakistan (SBP) interest rate outlook, that given that the central bank hiked the interest rates by a cumulative 425bps to 10.00% in 2018, it expects the SBP to remain on hold for for the remainder of the current financial year 2018-19.

The report states that “The upside pressure on nominal rates has come despite a drop in headline consumer price inflation (CPI), which has declined for two consecutive months, coming in at 6 .2% y-o-y in December.” This puts the real interest rate firmly in positive territory and suggests that the SBP is taking a pre-emptive stance on preventing an inflation spiral.

Going further, the document adds that, with price pressures likely to remain stable over the coming months due to the decline in oil prices and the pre-emptive hikes, which will help offset the second round effects of PKR depreciation, Fitch Solutions believes that the SBP is now ahead of the curve and will likely remain on hold for the remainder of FY20 18 /19 as it balances the need to support economic activity and maintain price stability.

Regarding Inflation, the research house opines that the decline in energy imports and the cumulative rate hikes in 2018 will help to stabilize the country’s external account and anchor the rupee, allowing core inflation pressures to head lower over the coming months. “This informs our forecast for inflation to average 6% in FY20 18 /19 and FY20 19 /20.

Fitch Solutions expects that SBP to adopt a wait and see approach over the coming months as it assesses the impact of the aggressive hiking that has taken place over the past year and turns its attention to supporting economic growth.

“We believe that policymakers will likely be mindful of undermining economic activity over the coming months particularly as an IMF bailout agreement will mean that economic growth headwinds from fiscal tightening will likely intensify.

Adding on, the reports says that the steep drop in oil prices should help to stabilize the rupee and prevent a spiral of higher inflation and currency weakness from taking hold in the near-term; however, from a long term perspective, money and credit growth remain problematic and suggest that inflation pressures are likely to remain fairly elevated.

In addition to this, Fitch solutions has revised its forecast for Pakistan’s fiscal deficit as a share of GDP to come in at 6%in FY2018/19, from 5.8% previously.

“Although the government will likely have to cut its spending over the coming months, we believe that there will be limited room for policymakers to cut either current or development expenditure,” says the report.

Meanwhile, revenue growth is likely to be dragged down by the poor economic growth outlook. “The government will likely have to cut back on its expenditure over the coming months as it looks to secure funding from the IMF under the bailout program amid weak revenue growth. The widening current account deficit, weakening currency, and dwindling foreign reserves suggest that the current fiscal trend (where expenditure continues to outpace revenue growth) is unsustainable,” remarks Fitch.

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Posted on: 2019-01-07T10:26:00+05:00