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.
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.
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