Analysts expect SBP to keep interest rate unchanged

Nine out of 10 economists told Bloomberg the target rate is unlikely to change

Kazim Alam July 29, 2016
Nine out of 10 economists told Bloomberg the target rate is unlikely to change. CREATIVE COMMONS

KARACHI: Most analysts expect the State Bank of Pakistan (SBP) to keep the benchmark interest rate unchanged in the monetary policy announcement due on Saturday (today).

In a recent survey conducted by Bloomberg, nine out of 10 economists said they expected the target rate to remain at 5.75% for the next two months.

SBP cuts policy rate by 25 basis points

The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the interbank market. It is one of the tools that the central bank uses to ensure price stability in the economy.

Decreasing the target rate poses the risk of high inflation, but also stimulates economic growth by making credit cheaper. In contrast, raising the target rate restricts the level of liquidity, which subdues consumer prices in the economy.

The central bank tries to strike a balance by targeting the overnight cost of funds at a level that promotes maximum economic growth without causing high inflation.

According to Global Securities analyst Yousuf Rahman, the SBP will likely opt for the status quo in view of “contained inflation” expected in the next two months.

He said the SBP will keep the target rate unchanged in the light of recent (and anticipated) recovery in international oil prices and a worsening balance of payments.

As measured by the Consumer Price Index (CPI), inflation for June remained at 3.2% on a year-on-year basis.

Monetary policy statement: Interest rate cut surprises SBP watchers

“Despite a stable foreign reserve situation, widening trade gap will likely force the SBP to keep the rate unchanged,” Rahman added.

The newly established Monetary Policy Committee (MPC), which is headed by the SBP governor and includes three independent economists as external members, takes the decision to revise or maintain the target rate after taking into account factors like anticipated inflation, foreign exchange reserves, commodity prices, etc.

SBP Governor Ashraf Wathra told Bloomberg on Thursday the MPC will be “cautious this time making a move either way” given the possibility of an increase in inflation.

The MPC had reduced the target rate by 0.25% in its last announcement in May. The move had surprised most analysts, as the SBP itself stated at the time that it was expecting inflation to “attain a higher plateau.”

Yet eight of the nine MPC members ended up favouring a rate cut, although each of the 22 analysts polled by Bloomberg in May expected a no-change announcement.

According to Insight Securities Executive Director Zeeshan Afzal, the CPI is likely to jump to 5% by the end of 2016 owing to the disappearance of a favourable base effect.

“Going forward, we see up to 50 basis points (0.5%) rise in the policy rate, as rising inflation, possible trade deficit and currency pressures could build a case for higher interest rates in early 2017,” he said.

Published in The Express Tribune, July 30th, 2016.

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