SBP expected to hike interest rate, but analysts divided over how much

Move meant to deal with inflation, current account and fiscal deficits

KARACHI: The State Bank of Pakistan (SBP) is likely to increase the benchmark interest rate by 50 to 100 basis points today (Saturday), as expectations of a higher pace of inflation in months to come become stronger.

Several brokerage houses anticipate a rate hike in the range of 50 to 100 basis points. At present, the key interest rate stands at 6.5%.

A higher interest rate makes borrowing expensive, and slows down economic growth by curtailing demand.

“We (JS Global Limited) estimate a hike of 100 basis points,” JS Global Chief Commercial Officer Khurram Schehzad told The Express Tribune.



The move is targeted at cutting imports and reducing demand for dollars in the economy to stabilise foreign currency reserves, he said.

Reserves have been depleting rapidly in the last few months as a huge import bill, repayments to international creditors and servicing debt take toll.

At less than $9.5 billion, reserves are now barely enough to finance two months of imports.

Additionally, export proceeds combined with workers’ remittances have been unable to match the increase in imports, widening the current account deficit to $15.96 billion in the first 11 months of the previous fiscal year.

Besides, expenditures have also swelled significantly during the election year, with the fiscal deficit set to cross 7% of GDP.

The fiscal and current account deficits have become massive challenges for the economy. The rupee has already weakened by over 15% in the last seven months, stoking fears of inflation.

“The (inflationary) impact of over 15% rupee depreciation is yet to come. This, along with exorbitant fuel oil imports, is to take inflation to a remarkable high,” Schehzad added. “The central bank’s precautionary approach to deal with anticipated higher inflation suggests a rate hike.”



The central bank has cumulatively increased the rate by 75 basis points since January 2018.

Senior Analyst Tahir Abbas said Arif Habib Limited expects a hike of 50 basis points.

The brokerage house anticipated inflation at 6.75% in the current fiscal year 2019 compared to 3.9% in the previous year.

Topline Securities Head of Research Saad Hashmi said there are higher chances that the central bank would increase the rate by 100 basis points.



“The expected surge in inflation, current account deficit and fiscal deficit; all suggest the central bank would cumulatively increase the rate by 200 basis points till December,” he said

Published in The Express Tribune, July 14^th, 2018.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.