Market anticipates 1% hike in key interest rate

State Bank of Pakistan is going to announce monetary policy today

KARACHI: The State Bank of Pakistan (SBP) is expected to hike the benchmark interest rate by one percentage point to 9.5% on Friday (today) to make borrowing expensive in a bid to apply brakes on the accelerating inflation in the country.

According to IMS Sales and Bloomberg survey of 10 research houses, all the participants have anticipated the tightening of the monetary policy by one percentage point.

The recent demand from the International Monetary Fund (IMF) to increase interest rate also bolsters expectations of a rate hike. Pakistan recently ended talks with the international financial institution for a bailout package, but no agreement could be reached.

The benchmark Consumer Price Index (CPI) inflation hit a 50-month high at 6.8% in October 2018 on a year-on-year basis compared to 5.1% in September 2018, according to the Pakistan Bureau of Statistics (PBS).

“We foresee a 100-basis-point rise,” Arif Habib Limited Head of Research Samiullah told The Express Tribune. “We forecast inflation rate will peak at 9.05% in January, 9.9% in February and 10% in March 2019 in the backdrop of a recent increase in gas, electricity and petroleum prices,” he said.

Moreover, fluctuations in rates of return in the money market, especially on treasury bills, usually demonstrate whether the benchmark interest rate will go up, down or remain stagnant. The recent hike in the T-bill rates points to a 100-basis-point rise in the interest rate, he said.

“The money market (T-bill rates) has already priced in the anticipated 100-basis-point hike. The one-year T-bill rate is already 120 basis points higher than the current interest rate of 8.5%, which is unusual.”

Cumulatively, in the last 10 months, the central bank increased the rate by 275 basis points to 8.5% to contain the unsustainable current account deficit. The strategy to narrow down the deficit has achieved its target, Samiullah commented.

“The current account deficit has dropped to $2.7 billion in the past three months (August-October 2018) compared to $5.9 billion in the prior three months (May-July 2018),” he said.  The gap has also contracted due to a 27% depreciation of the rupee to Rs133.99 against the US dollar in the inter-bank market in the last 11 months, he said.

The analyst was of the view that low oil prices in the international market would help address the challenges faced by the beleaguered economy.

“The fall in oil prices may also help the country in containing inflation if the government decides to pass on the drop to end-consumers, partially or completely,” he said.

JS Global Corporate Sales Head Atif Zafar agreed that the central bank would increase the interest rate by one percentage point to fight inflation. “The interest rate should remain 150 to 200 basis points higher than the existing rate of inflation,” he said.

The inflation rate of 7% in the previous month (October) suggests a 100-basis-point increase, he said.

Besides, Pakistan remained in talks with IMF for a bailout package, while the financial institution has conditioned increase in the interest rate to fix the faltering economy. “The IMF conditioning may also direct the authorities to increase the interest rate,” he said.

Published in The Express Tribune, November 30^th, 2018.

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