Will SBP meet market expectations on policy rate?

November 04, 2024 (MLN): The monetary policy of the State Bank of Pakistan (SBP) will be revealed today. The market anticipates that it will lower its policy rate to reflect the decline in inflation.

The question of how much is more important. SBP might not follow market demands.

The gap between the IMF target and the level of economic progress is the disproportionate factor. The pledges and quarterly targets are not entirely fulfilled. 

This, in my opinion, will be the decisive element. According to the last report from the monetary policy committee (MPC), inflation is declining, is under control, and won't spike. Indicating that the economy is doing well and that there is no chance of either a recession or deflation.

How much and how soon will the Central Bank respond is the main question that everyone must be asking. The SBP has begun repurchasing Market Treasury Bills (MTBs), which is a good thing, but economic activity has not increased as quickly.

Bank lending is not designed to boost the economy as a result of the liquidity injection. The levels of ADR are pitifully low. 

A larger portion of the funding is used to reduce government securities and (OMO), which also contributes to lowering the national debt. 

Long term bond yields are consistently lower than short term bond yields because the yield curve is occasionally inverted. 

In theory, this is a bad indicator for any economy, and the monetary policy statement needs to take this into consideration and address the problem. 

I don't know if this or the ADR issue has ever been discussed by the MPC members.

However, I have no doubt that they must be conscious of this aspect. Because recession is the ultimate outcome of this kind of economic situation. 

If we examine the most recent MPS releases, the SBP appeared more at ease regarding inflation.

Despite lowering the policy rate by 450 basis points, the inflation figure indicates that monetary policy has been in a restrictive zone since June 2024.

This indicates that SBP still has room to lower its policy rate to a level that is neutral. However, accurately predicting the magnitude of SBP's move is a difficult decision.

I have predicted a 150 basis point decrease in the policy rate, with a probable range of 100 to 200 basis points, in my projection to SBP.

The writer is the former Country Treasurer of Chase Manhattan Bank

Disclaimer: The views and analysis in this article are the opinions of the author and are for informational purposes only. It is not intended to be financial or investment advice and should not be the basis for making financial decisions.