Preview: Discount rate likely to stay unchanged

Eight of ten analysts expect status quo for the fourth time in a row.

KARACHI:

The State Bank of Pakistan is expected to stick to its wait-and-see approach and leave the discount rate unchanged again in the monetary policy today (Saturday), according to a poll conducted by The Express Tribune.

The discount rate, revised every two months, is the interest charged by the central bank when it lends to banks.

Eight of ten analysts polled by The Express Tribune on Friday forecast that the central bank’s monetary policy committee will leave the discount rate unchanged at 14 per cent. The State Bank of Pakistan in the last two announcements left the discount rate untouched and the same is expected this time around.

All indicators including easing inflation and surging current account lead to a status quo announcement, said IGI Securities analyst Ahmed Raza Khan.

It will be premature for the central bank to increase the discount rate before the annual budget and dampen the entire sector’s sentiments, said JS Global Capital analyst Mustufa Bilwani.

Easing inflation

The key indicator for inflation, the consumer price index, eased to 13 per cent in April from 15.5 per cent in December 2010.

This consequently resulted in a positive real interest rate, according to BMA Capital. Negative real interest rate during August, September and November 2010 had forced the central bank to raise interest rates. This further strengthens the view that any hike in the discount rate in the next meeting is unlikely.

Government borrowing from the central bank is expected to remain under the prescribed levels of Rs1,280 billion, another positive pointer, according to analysts. Recent monetary aggregate data shows that the desired level is in place.

External account in comfort zone

The external account remains in a comfort range for the central bank, due to the sizeable cushion it provides against the risk of expansionary fiscal stance translating into external account weakness, according to an Elixir Securities research note. The current account showed a surplus of $748 million against deficit of $3.46 billion posted last year on the back of record remittances and lower trade deficit.

Trade account benefited from higher prices of textile products, which drove textile exports up 25 per cent to $2.1 billion on a yearly basis despite flattish volumes.

Remittances in April crossed the $9 billion target set for fiscal 2011 and reached $9.05 billion in the first 10 months of the current financial year, showing an increase of $1.74 billion or 23.81 per cent compared with the same period last year.

Published in The Express Tribune, May 21^st, 2011.