August 5, 2022 (MLN): The nascent recovery in PKR and other macro and political developments have started creating divergence in policy rate expectations for MPS on 22nd August.
Participants are also taking a cue from moves in PKRV to firm up their expectations. This is in contrast to the widespread view of further hikes being inevitable till a few weeks ago.
The survey of money managers conducted by JS Global to gauge the quantum of changed expectations reveals that 63% of participants expect a hike between 50-200bps. More interestingly however 37% of respondents now feel that SBP will opt for the status quo.
The view of the status quo in policy rate is attributed to a sharp rebound where PKR has recovered 5.4% in the last two days, declining Pakistan’s international bond yields, 47% MoM decline in July’s trade deficit, and the impact of monetary tightening which has begun to slow down economic activity, proxy being lower cement, autos and OMC sales.
“The respondents believe that these reasons will likely lead the Monetary Policy Committee (MPC) to adopt a wait and watch approach,” the report underlined.
On the other hand, investors who are expecting a continuation in monetary tightening are of the view that a consistent trend in PKR appreciation, lower current account deficit and lower economic activity might be needed by the MPC before it can be concluded that the increase in policy rate so far is sufficient for the heated economy to cool, the report quoted.
The sustainability of a $2.6bn trade deficit and persisting higher CPI readings expectations for the next 10 – 12 months are the major concerns that are emerging.
The report highlighted that July’s economic data contains a number of one-offs such as the eid holidays, heavy monsoon rains and pre-buying of oil in the earlier months.
Hence, the data points of the next few months would have to be dissected to accurately gauge the impact of the increase in interest rates from 7% to 15%, it added.
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