State Bank expected to leave discount rate unchanged

All six analysts polled agree that status quo will be maintained again.

Faseeh Mangi March 14, 2011


The State Bank of Pakistan (SBP) is likely to keep discount rate unchanged at 14 per cent in the monetary policy announcement due by the end of this month, according to a poll conducted by The Express Tribune.

The discount rate, also known as the benchmark rate, is the interest charged by the central bank when it lends to commercial and other banks.

All seven analysts in the poll on Monday forecast that the central bank’s monetary policy committee will leave the discount rate unchanged at 14 per cent.

The State Bank of Pakistan adopted a ‘wait-and-see approach’ and left the policy rate unchanged at 14 per cent in the previous monetary policy announcement. The discount rate is reviewed every two months.

Pressure on the political front will keep the key policy rate at the same level, said Aziz Fida Hussain Securities analyst Hasnain Asghar Ali, adding that delay in power tariff hike by a month will also support the decision.

Considering multiple factors, including declining inflation, lower government borrowing from the central bank, improved external account with a stable reserves position, positive real interest rates and ongoing restructuring process – all leads to SBP holding the discount rate at 14 per cent, said analysts.

Government adheres
to promises

It has been highlighted several times that a non-coherent policy regime, which includes fiscal and monetary policies, can never achieve the desired economic stability, BMA Capital analyst Abdul Shakur said in a research note.

It is encouraging that the government has adhered to structural reforms and shifted financing pressure from the central bank to commercial banks, he added.

The government had vowed to contain its borrowing from SBP at September 2010 level of Rs1,280 billion. Recent monetary data shows that the desired level of Rs1,280 billion is in place.

Furthermore, the government is also pursuing to minimise budgetary gap through increasing revenues and decreasing expenditures for the remaining period of fiscal 2011. Therefore, ongoing fiscal consolidation is at least heading in the right direction, said the research note.

Declining inflation one  of the positives

The Consumer Price Index, a key indicator of inflation, showed a rise of 12.91 per cent in February against 14.19 per cent recorded in January. Resultantly, the real interest rates have turned positive as previously observed in July, informed Shakur.

This development is led by declining prices of food items and government’s intervention to limit the impact of oil price increase in the global market.

February: a month of records

February was a good month for the economy with both exports and remittances surging to new highs.

Remittances sent home by overseas Pakistanis soared 20 per cent in the first eight months (July-February) of the current fiscal year, in the wake of a tightening of noose around illegal channels, a stable rupee and contribution of charity money after flood ravages. Remittances totalled $6.96 billion in July to February 2010-11, compared with $5.79 billion in the corresponding period of the preceding year.

Also, for the first time in 63 years, the country’s exports grew by 42 per cent to $2.2 billion in February over the corresponding month of the previous year.

Money market trend

In the recent treasury bill auction held on March 9, cut-off yield for three-month bills declined by nine basis points to 13.9 per cent while yields on six-month and 12-month papers were maintained at 13.68 per cent and 13.85 per cent, respectively.

As the secondary market normally adjusts yields preemptively, the recent trend shows market expectations of an unchanged policy rate this time round, said Shakur.

Furthermore, it is important to note that yields had come off significantly soon after the auction.

Published in The Express Tribune, March 15th, 2011.


John | 10 years ago | Reply Let us see if the IMF agrees. With Pakistan workers returning home and uncertain job climate in Libya and parts of middle east, remittances are likely to be in surge this quarter. Whether they would hold to the same level as last year by June is the issue. Increasing oil prices and delay in implementing proposed tax reform can only hurt the recovery. T bill auctions interest rates leave little bit of profit for the treasury at the discount window, but remains to be seen if the Govt maintains it's promised austerity course or yield to political pressure.
Meekal Ahmed | 10 years ago | Reply This is a good analysis which, as I have been saying for some time, must and does "deflate" variables by the rate of inflation to look at the "real" rates. Otherwise in an environment of high inflation, nominal numbers make no sense. Ideally we should deflate by forward or expected inflation, not past or instantaneous inflation. I have my strong reservations about whether remittances are rising because of a crack-down on the hundi. There is no way to establish the veracity of that claim -- although it is something which government would want you to believe. What is really happening on that score, no one really knows. It is a bit of a mystery. Moreover, the crack-down was in 2008 when some money changers were arrested (against the background of large-scale capital flight). Weren't they freed recently with no charges? If we really want to divert remittances to official banking channels in a durable way, ALL banks should send their people out to the remitting country and they should make personal contact with the remitter. Like a road-show. I know some countries do that. We should too.
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