100bps interest rate hike likely

SBP has already raised interest rate by 575bps since May 2018

KARACHI: The State Bank of Pakistan (SBP) is expected to hike the key interest rate by 100 basis points (bps) on Tuesday following a recently adopted approach to keep the rate 2-2.5% higher than the rate of inflation.

“The average rate of inflation is likely to be around 11-11.5% for the first quarter (July-September) of current fiscal year 2019-20,” Sherman Securities’ analyst Chander Kumar estimated while talking to The Express Tribune.

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The central bank has already increased the key interest rate by 5.75% since May 2018 to an eight-year high at 12.25% at present. It is scheduled to announce the rate in its bi-monthly monetary policy statement on Tuesday.

“Street consensus indicates the policy rate will be increased by 100 basis points (bps),” Alpha Beta Core CEO Khurram Schehzad said. Out of 12 analysts, eight expected the policy rate to rise by 100bps, he said. Among the remaining four, two expect an increase of 50 basis points and the other two see an increase of 75bps, he said.

“New taxes, rupee fall and increase in gas and electricity prices will push up inflation. To fight inflation and keep the real interest rate positive, the SBP may increase the policy rate by 100bps,” Topline Securities CEO Muhammad Sohail said. Kumar pointed out that inflation data for first two weeks of July 2019 suggested that the CPI would accelerate to 10.50% for the full month. “The recent increase in gas prices by 70% for domestic consumers has alone raised inflation by 1.1%,” he said.

Arif Habib Limited CEO Samiullah Tariq said his research house expected the central bank to increase the policy rate by 100bps to 13.25%.

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“Primary reason for this increase is to keep the real interest rate positive in light of rising inflation during 1QFY20 on the back of increase in prices of electricity and gas,” he said. Average inflation for 1QFY20 is expected to settle at 12.11% while the policy rate of 12.25% will imply a real interest rate of just 14bps.

“The data for past 48 months exhibits that average real interest rate has remained approximately 2.3% positive, while under the last IMF programme (September 2013 to September 2016), the real interest rate hovered at an average of 3.1% positive. Therefore, it seems unlikely that the central bank would let the real interest rate go negative or below 1%. The IMF staff report also stated that the real interest rate would be kept positive to counter inflation,” he said.

Published in The Express Tribune, July 16^th, 2019.

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