Expectation: SBP will maintain benchmark interest rate, analysts predict

Currently, the discount rate is 6.5% while the target rate stands at 6%

KARACHI: Analysts expect the State Bank of Pakistan (SBP) will maintain the benchmark interest rate in its upcoming monetary policy announcement.

Expected rise in inflation in the second half of 2016 along with challenges posed by stagnant exports and a possible interest rate hike in the United States are the main reasons for most analysts’ belief that the SBP will maintain the status quo in the next monetary policy due on Saturday.

The discount rate is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window on an overnight basis. It is slightly above the policy rate, which is the ‘target’ interest rate that the central bank tries to maintain in the interbank market to control money supply and achieve price stability and economic growth targets.

Currently, the discount rate is 6.5% while the newly introduced target rate stands at 6%. The SBP reduced the target rate from 6.5% to 6% last September after bringing it down by 300 basis points in 2014-15. The SBP maintained the target rate at 6% in the subsequent monetary policy announcements in November and January.

Analysts at BMA Capital, Global Securities, Elixir Securities and Alfalah Securities expect no change in the interest rates while those at Taurus Securities “see high chances of further monetary easing” in view of the prevailing low inflation rate.

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. With the mild inflation outlook in the short-term at least, analysts at BMA Capital believe the average consumer price index for April-June will remain less than the average for Jan-March (3.8%).

“Given the limited chances of recovery in exports (down 10% in Jul-Mar) in the short term and the conclusion of the IMF programme by June, we believe the SBP will remain wary of emerging risks to the rupee-dollar (parity) in July-Dec,” said Muhammad Affan Ismail of BMA Capital.

The board of directors of the central bank, which has the representation from the Ministry of Finance, would set the monetary policy direction until January. 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).

Bond market signalling status quo

Yields on the market treasury bills of different tenors have remained largely flat in the latest auction. 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.

In the market treasury bill (MTB) auction held on March 30, the cut-off yields registered little change over the preceding auction. According to a research note issued by Global Securities, the cut-off yield for the three-month instrument inched up 1.82 basis points for the three-month instrument while it declined 1.69 basis points and 1.3 basis points for six- and 12-month papers, respectively.

“In view of the yield movement in the MTB auction, it can be said the market expects a (policy rate) cut later during the year, as the interest in six- and 12-month MTBs is evident,” according to Salman Rashid of Global Securities.

Published in The Express Tribune, April 9^th,  2016.

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