Upcoming monetary policy: Majority believes status quo to be maintained

Analysts believe the CPI will remain in the range of 3.5%-4% for 2015-16

KARACHI:

Analysts expect the State Bank of Pakistan (SBP) to maintain the status quo in its upcoming monetary policy announcement.

A majority of analysts The Express Tribune polled believe the SBP will keep the benchmark interest rate unchanged at 6% for the next two months.



The target rate is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window on an overnight basis.

Speaking to The Express Tribune on Friday, Intermarket Securities Head of International Sale Dr Gohar Rasool said he expected no change in the target rate for now. AKD Securities, Global Securities and Shajar Capital also believed the status quo would prevail in the next monetary policy announcement.

After bringing it down by 300 basis points in 2014-15, the SBP had further reduced the target rate from 6.5% to 6% in its September announcement. It opted for the status quo in its last bi-monthly monetary policy announcement in November.

Up until now the board of directors of the central bank, which has the representation from the ministry of finance, would set the monetary policy direction. However, amendments have now been introduced in the SBP Act 1956 under the current loan programme with the IMF, resulting in the establishment of an independent Monetary Policy Committee (MPC).



But the nomination of three independent economists as MPC members has not been finalised yet, which is delaying its first meeting. Although the central bank has not announced the date for the next monetary policy announcement, it will likely take place on January 30, which is the last Saturday of the month.

Inflation expectations play a key role in the formulation of monetary policy.

Central banks ‘tighten’ monetary policy by increasing the benchmark index rate when they expect inflationary pressures building up.

However, with the mild inflation outlook in Pakistan, analysts believe the consumer price index (CPI) will remain in the range of 3.5%-4% for 2015-16, which is significantly lower than the government’s target inflation rate at the beginning of the fiscal year.

The IMF has also reduced the projected inflation for 2015-16 to 3.7% from 4.7%. However, AKD Securities believes inflation number will tread up steadily until April because of the low-base effect.

In its press release on January 12, the IMF said the monetary policy should remain ‘prudent’ and focused on price stability. Its directors supported targeting positive real interest rates and keeping inflation expectations well-anchored, it said.

Contrary view

Topline Securities analysts expect there is a ‘strong chance’ of 0.5% reduction in the benchmark interest rate.



Yields on the market treasury bills of different tenors have been falling in recent auctions. The yield on a government security is inversely related to its price. An increase in the bond prices shows people are keen to lock in their investments as they expect the interest rate to go down going forward.

According to Topline Securities, secondary market yields on treasury bills and government bonds have come down by 20 to 30 basis points since the beginning of January, which further strengthens the chances of a further rate cut.

Published in The Express Tribune, January 23^rd, 2016.

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