KARACHI: The State Bank of Pakistan’s (SBP) monetary policy committee is all set to surprise a large section of the capital market as almost all the pundits expect an aggressive key interest rate hike despite apparently no immediate need of it. However, they are uncertain as to how big the hike could be.
“It (interest rate hike) will be more aggressive and above market expectations,” Emerging Economics Research MD Muzammil Aslam told The Express Tribune.
The market expected a rate hike in the range of 1-1.5 percentage points in the monetary policy statement to be unveiled by the central bank on Monday, he said.
The Express Tribune conducted a brief market survey and asked eight research houses about their expectation on the interest rate revision for the next two months. Three of them said they anticipated a hike of one percentage point, two expected an increase of between one and two percentage points, one predicted a rise of between 1.5 and two percentage points and two saw a two-percentage-point hike.
The central bank has already increased the rate by cumulative five percentage points since January 2018 to a six-year high of 10.75% at present. “It may be a surprising monetary policy statement (as) it is very hard to predict what has been decided between the government and the IMF (International Monetary Fund),” Aslam said.
To recall, the government signed a 39-month loan programme worth $6 billion with the IMF last Sunday. Market speculations suggest the government has agreed to increase the key interest rate by two percentage points to win final approval of the IMF board sometime next month.
JS Research Head of Corporate Equity Sales Syed Atif Zafar expected a two-percentage-point hike in the policy rate “because of preconditions agreed with the IMF”.
AKD Securities CEO Farid Alam also anticipated a two-percentage-point hike for “no reason except for a poorly negotiated deal with the IMF”.
Responding to a question, Aslam said considering for a while Pakistan had not entered into an IMF loan programme, then there was no immediate need for the interest rate hike.
“The existing interest rate at 10.75% remains much higher than the average rate of inflation at 7% for the first 10 months (Jul-Apr) of the current fiscal year 2019,” he pointed out. The IMF adopts a pro-active approach, meaning it convinces loan-acquiring countries to keep the interest rate high than the projected rate of inflation in future rather than existing rate of inflation, he said.
“Inflation is set to be in double digits in July,” Sherman Securities’ analyst Chandar Kumar said.
Inflation would grow in the backdrop of rupee depreciation against the dollar, increase in petroleum oil prices in the international and domestic markets, and a further increase in power and gas tariffs in the near future, he said.
Topline Securities CEO Muhammad Sohail said, “A one-percentage-point hike is likely due to expectations of higher inflation and to curtail aggregate demand in the economy and stop dollar hoarding.” Insight Securities’ analyst Zeshan Afzal expected a rate hike in the range of one to two percentage points “to take the consumption down and make adjustments in line with the economic policy under the IMF programme.”
Arif Habib Limited said in a commentary it expected a one-percentage-point hike. “The aggressive monetary tightening by the central bank is expected to continue as it is going to be the seventh consecutive rate hike.”
What institutional investors expect?
The brokerage house said it conducted a short survey with institutional investors regarding their view on interest rate in the upcoming Monetary Policy Statement (MPS) and outlook on interest rates going forward.
“Majority of the respondents (53%) are of the view that the interest rates are likely to see a one percentage point spike in the upcoming MPS (monetary policy statement). Only 12% of the respondents were of the view that the rates may see a 1.5 percentage points surge,” it said.
With regards to whether interest rates have peaked, 71% of the respondents are of the view that the rate hike era is yet to halt and will see further hike going forward.
“We asked the poll respondents about their one-year forward view on the interest rate cycle. 48% of the respondents are of the view that interest rates will see a surge of half-to-one percentage points in the next one year. 29% of the respondents do not see any further rate hike following the upcoming MPS,” it said.
Published in The Express Tribune, May 19th, 2019.